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On the morning of June 1, 2012, General Motors announced to the market that it was planning to transfer $26 billion in pension assets to insurance-giant Prudential. The company’s stock rallied from $21.65 to $23.34 before closing slightly up for the day. Yet sharp observers of institutional investing knew that the deal had larger implications than minor movement in one particular security. To these observers, the GM dea—and the $7.5 billion Verizon deal that soon followed—signaled a new age in the corporate pension space.
But how did these deals get done? General Motors, Verizon, Prudential, Oliver Wyman, and others intimately involved have largely refused to speak about the deals. Until now.
“One thing we strongly believe is that when you’ve seen one pension plan, you’ve seen one pension plan,” Dylan Tyson warned me before agreeing to pull back the curtain on the two deals that he helped execute as part of Prudential’s Pension & Structured Solutions group, “That said, let me walk you through the steps.”
The deals actually originated far from Prudential’s Newark headquarters, Tyson noted. “These start as C-suite conversations with their closest advisers,” he said. “After they’d discuss it—it’s largely a discussion of what risks the corporation wants to retain and which ones it doesn’t—they will set up an annuity feasibility inquiry. The companies go to the marketplace and get an overall sense of capabilities from market participants. They get a ballpark in terms of price. Not a lot of data changes hands because this is an exercise in high-level economic data, not the fine details of a deal that will emerge later.”
By this point, other financial giants were already involved. In both GM and Verizon’s case, one such firm was Morgan Stanley—whose head of Corporate Strategies Group, Caitlin Long, was instrumental with both. The firm advised the plan sponsor in both transactions, and, according to a conference call with investors at the time of the deal, GM CFO Dan Ammann noted that it had been in the works for a year. It is understood that Long and Morgan Stanley had been working with Ammann in a traditional corporate finance role, which then focused on the pension risk transfer when the opportunity arose.
In both cases, senior executives decided that the marketplace could handle the size of the transaction and that the deals made sense from a corporate perspective. “At this point, there is more data sharing,” Tyson continued. “We start to look at plan data on a more detailed level. We’re using it for pricing purposes, to see if we could really underwrite the liability, and where the asset portfolio is currently positioned.”
And then it’s decision time. “At this point, the corporations are generally still considering whether there is a transaction to be had from the point of corporate shareholders,” Tyson said. “You’ve worked through the price discovery, you understand the broad contours of asset portfolio, and at that point there is a decision; Do we go forward?”
By this point, there were even more players involved, not least of which were the independent fiduciaries tasked with looking out for plan participants. For GM, this was State Street; for Verizon, Fiduciary Counselors. Oliver Wyman—lead by industry veteran Mick Moloney—advised both.
“Security—that’s their primary concern,” Moloney told me. “Their central role is to select annuity providers and negotiate on behalf of the plan participants. Under the Employee Retirement Income Security Act (ERISA), and under guidance from the Department of Labor, they need to keep a keen eye on selecting the safest available annuity provider, and need to negotiate all aspects of the deal affecting participant security.” This comes in two forms, he said: the safety of the insurance institution itself, and the contract structure—particularly whether they put a separate account structure around the annuity itself, so assets will be ring-fenced. While the GM and Verizon deals were single-insurer structures with Prudential, Moloney expects to see multi-insurer structures emerge as the market evolves.
Tyson said that this is were they entered implementation mode. “At this point, you have a number of different work streams,” he said. “You have the transaction work stream—essentially, what it would look like at a high level. You have the liability work stream—finding the data you need to get to very best price for the specific liability. You have the asset work stream, which is figuring out where to move assets for the inevitable handoff to Prudential. You also have the fiduciary work stream, which meant us supporting the independent fiduciaries as they performed their due diligence.”
Then comes deal time. "What the companies and Prudential signed was a definitive agreement that committed the parties to the transaction," Tyson said. "The transaction ultimately facilitates a purchase of a group annuity contract—the technical term for pension risk transfer. From signing to close on both deals, the asset managers were preparing the assets that Prudential would receive to support the liabilities."
In GM's case, one of the key points of contact was Dhivya Suryadevara—the firm's managing director of investment strategy and fixed income (and a member of aiCIO's Forty Under Forty, see page 36). For the five months between the signing of the deal and the close, it was her job to manage the assets that would be handed off to Prudential—in effect, turn the GM portfolio into an insurance-like portfolio in what would be one of the largest transitions in history. "I was in charge of the asset side of the deal—organizing, in a five-month period, the assets to hand off to Prudential," she told me. "The harder part was managing the market and interest-rate exposure we had from the time we inked the deal until the time it was closed. But it was a team effort. It was like an orchestra that had to work perfectly—so it was really a huge, complex group effort."
"We're lucky it went without any major hiccups," Suryadevara says. "You can't write everything into the contract on a deal like this, so we're lucky we had a phenomenal and flexible partner on the other side"
While many members of the corporate pension world will understand the processes behind the GM and Verizon deals, not all will appreciate it. Many corporate CIOs are not shy about the fact that they believe CFOs to be overpaying for Prudential's service. Gary Knapp, Prudential's head of LDI strategies, agreed that pricing in the current environment proves difficult for some CIOs. "I do get pushback from investment teams who balk at the current market price," he told me. "That's because the dollars needed to do pension risk transfer are a lot given current interest rates. So, because the absolute price feels high, they don't want to consider making a move until interest rates move higher."
The price may feel high, but few think that these two deals are outliers. The long-term trends are in Prudential's favor: Regulation, the improving health of corporate America combined with persistently low interest rates, and the trend toward de-risking have all aligned to make pension risk transfers enticing, if not entirely inevitable. As a result, many chief investment officers—even if they don't think the time or price is right—will likely be getting topic-specific visits from their CFOs in the coming years.
So who is next? In the GM and Verizon deals, both CIOs were on board, according to Morgan Stanley's Long. "Both Walter Borst and Ron Lataille were supportive of the deals," she said. "Interestingly, in both cases, you have two people who have not been career CIOs."
Therein lies a clue to future deals. All parties, naturally, were cagey about what lies ahead. The general consensus is that 2013 will be a learning year, and 2014 will bring with it a rush, if not a tidal wave, of transfers. However, in the meantime, another major pension-risk transfer deal is rumored to be in the hopper, although which plan sponsor is involved has yet to be revealed. But as one source told me, "Just think about a CIO who wants to become a CFO."
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