(April 26, 2013) – Buyouts are gaining in popularity thanks to the huge cost of legacy defined benefit pension plans burdening many companies across the US.
A report from Greenwich Associates found 17 major companies took pre-emptive action in offering notable lump-sum payouts in 2012 to current and/or former employees in an attempt to shed liabilities and help minimise the impact of volatility.
“Companies such as Lockheed Martin, J.C. Penney and NCR launched their lump-sum programs after Ford and GM kicked off the buyout blitz in the first half of the year,” the report said.
“Ford made its offer in April 2012 to 95,000 salaried retirees and former employees. GM followed with a similar offer to its employees in June, extending lump-sum options to salaried retirees unprotected by union contracts.”
Lump-sum buyouts not only offer the opportunity to derisk and remove liabilities from balance sheets, but they can also help reduce funding gaps which are another major concern for many US corporations, said the report.
A recent study conducted by Greenwich showed corporate plan funding ratios fell from 89% in 2011 to 81% in 2012 on average, mainly driven by declining interest rates. More than 60% of US plans currently have funding ratios of 85% or less, according to Mercer Investment Consulting. These funding gaps represent the highest ever and are “projected to negatively affect the balance sheets and 2013 earnings of some corporations”.
However Ford and GM still remain in the minority with offers to current employees, as many companies limit their buyouts to former employees. Sean Brennan, consultant at Mercer, said: “By offering a lump sum to these bigger populations, companies are more likely to reduce the liability associate with them.”
Lump-sum buyouts do carry high administrative and execution costs. While much of those fees depends on the size of the membership and the funding status of the plan, Greenwich Associates consultant Goran Hagegard admitted the data suggested derisking via lump-sum payments remains “largely aspirational” for all but the best funded US corporate pension plans.
Derisking is picking up speed across the Atlantic too, but the size of deals has fallen in recent months. A new report from actuarial consultants LCP, to be published at the end of April, will show that 2012 saw a rise in derisking deals, but that they came with a drop in value.