(July 19, 2012) — After July 20, the final figure for the General Motors (GM) and Prudential Insurance pension buyout will be settled—and the full scale of the largest pension risk transfer deal ever constructed will come into view.
For 42,000 GM retirees, Friday will mark the end of the election period during which they must decide whether to take a lump-sum payment from their former employer or receive an annuity from Prudential. How many people ultimately accept the payment will have a material effect on the ultimate size of GM’s landmark pension risk transfer deal with Prudential.
No matter what happens July 20, at the end of this year GM will offload $26 billion in pension obligations, representing what the company owes to 118,000 non-union retirees, from its balance sheet. How large the group annuity that GM will purchase from Prudential is still undetermined, however, because its size will reflect how many of the 42,000 beneficiaries take the lump-sum and therefore won’t be eligible for the annuity.
The value of lump-sum payments are calculated using a discount rate mandated by the Pension Protection Act. Pegged prior to the 2006 reform to the 30-year Treasury rate, the law now requires lump-sums to be based on a higher composite corporate bond rate, making them comparatively cheaper to offer. Ford, for example, recently announced its decision to offer lump-sum pension buyouts to about 98,000 retirees and former employees. Also increasing the attractiveness of lump-sums to plan sponsors is the lack of a risk premium owed to a third party.
Most experts estimate that the typical take-up for a lump-sum offer for retirees is likely between 50% to 80%. Yet the 42,000 retirees eligible for a lump-sum retired between 1997 and 2011, so GM is in uncharted waters.
“We look forward to welcoming GM retirees and to assuming responsibility for providing retirement income to each individual whose pension payments we will assume,” Dylan Tyson, head of pension risk transfer solutions, Prudential Retirement, told aiCIO. “Serving the needs of GM’s retirees is an honor and a responsibility that we take very seriously.” He noted that Prudential currently services the pension promises of more than one million individuals.
GM’s deal with Prudential is not the only news surrounding the automotive giant’s pension plan. The Chinese government is considering buying $1.5 billion to $2 billion of the pension plan’s illiquid private equity investments, the Financial Times reported this week. The sale would fit into GM’s recent moves to derisk its plan, of which the $26 billion buyout is the most extreme manifestation.