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Hickory, North Carolina is known for being the home of (a) one of the two remaining covered bridges in the Tar Heel state, and (b) perhaps the worst American polio outbreak of the 20th century. It is not known for pension innovation. Should it be?
In May, the Hickory Springs Manufacturing Company, with the help (and, perhaps, prodding) of Prudential, became the first American pension to complete a buy-in, whereby the Hartford-based financial powerhouse took on $75 million worth of risk from the company’s defined benefit pension plan. While buy-ins and buyouts have long been a staple of the European and United Kingdom pension market—where the Prudential name also holds sway—the Hickory Springs’ deal is being heralded as the precedent for American pension risk transfer.
“Europe and the U.K., they’ve been well ahead of America in terms of these types of deals,” Phil Waldeck, Prudential’s SVP for Pension Risk Management Solutions unit, told aiCIO in July. “They had large benefit figures, COLAs, and more teeth in their funding requirements—so it’s not surprising that they’d be earlier to go down the de-risking path.” This is a common story. Liability-driven investing (LDI)—often seen as a precursor to pension buyouts and buy-ins—was prevalent in Europe when only a handful of American plans had adopted it. Fiduciary management—or, as Americans usually call it, investment outsourcing—follows the same storyline. Pension buy-ins and buyouts, then, can be viewed as just another European import. “In 2012, the Pension Protection Act will force companies to write big checks for their pensions,” said Dylan Tyson, SVP at Prudential Retirement. “As they do, companies will ask themselves, for example, ‘am I a pension fund, or am I a car manufacturer?’ It’s not a question of if these types of deals will accelerate, but when—the regulatory pressure is just too great.”
The question, then, is this: If buy-ins and buyouts are to become standard American practice as funding levels increase, what will be next? Tyson, for one, sees another European innovation making its way to American shores. “Longevity insurance, for one, will become a tool used here,” he says. “It’s not really available today, but it could fit into an LDI strategy where the sponsor wants further protection against pensioner longevity risk. The Europe market started with LDI, then buyouts and buy-in, and then longevity risk transfer. That’s clearly where the market will go here.”
The innovative center of the American pension market can’t really be said to be Hickory, then. It’s actually Europe. At least they still have that covered bridge.
—Kip McDaniel