Pru Splits Latest Mega-Buyout Deal with Competitor

Kimberly-Clark—the company behind Kleenex, Huggies, and Tampax—has reached a deal to offload $2.5 billion in pension liabilities across two insurers: Prudential and MassMutual.

The transaction, expected to begin June 1, would rank among the five largest US pension-risk transfers (PRT) by total liability size. GM’s mammoth $26 billion deal from 2012 has held fast in the top spot, followed by 2013’s $7.5 billion annuity purchase by Verizon and Motorola’s $3 billion transfer last year.

New Jersey-based Prudential acted as the sole annuity provider in all of these mega-buyouts—a streak set to end with Kimberly-Clark. Prudential, the sector’s most dominant actor, has agreed to cover half of the roughly $2.5 billion liability and administrate benefits. MassMutual has signed on to shoulder the remaining $1.25 billion.

“The fact that this transaction involves two insurers is interesting,” Sean Brennan, Mercer’s top US PRT expert, told CIO. “This is the first one of the jumbo deals to do that.”

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Kimberly-Clark, Brennan continued, was “not just thinking about what makes sense from a corporate perspective, but also a participant perspective. Multiple providers enhances participant security relative to a single insurer general account, and increases competition.”

Kimberly-Clark CFO Mark Buthman suggested that by splitting each retiree’s benefit evenly between Prudential and MassMutual—“both highly-rated insurance companies and experts in this field”— this PRT de-risked both the corporate balance sheet and members’ retirements.

State Street Global Advisers, which represented participants’ interests as an independent fiduciary, settled on the MassMutual-Prudential pairing as “the safest available structure” to replace the pension.

Furthermore, according to Mercer’s Brennan, the entrance of another player into the formerly monopolized space bodes well for the industry overall. Plan sponsors offloading less than $1 billion in liabilities have plenty of options for bulk annuity providers, he noted. “Above $1 billion—Prudential has been successful in that account. But we do see insurers getting into the US market, or revisiting it: Legal & General, for example, has been building capabilities.”

Prudential remains a dominant force in Brennan’s view, with “a lot of appetite to take on transactions.” Still, he suggested, MassMutual’s mega-PRT debut along with Legal & General’s US goals bode well for plan sponsors looking to wash their hands of large liabilities. “We welcome the addition to the competitive landscape.”

Aviva Investors has been fined £17.6 million ($27.2 million) by the UK’s Financial Conduct Authority (FCA) for conflicts of interest on its fixed income trading desk.

The FCA’s report detailed how traders were given a greater share of performance fees from long/short hedge funds than for long-only products, resulting in a bias from some traders towards higher-paying strategies through “cherry-picking” securities.

“There were significant deficiencies in responsibilities, policies and procedures, systems, management information, [and] culture.” —FCA“Weaknesses in Aviva Investors’ systems and processes meant traders could delay recording the allocation of executed trades for several hours,” the FCA said. “By delaying the allocation of trades, side-by-side traders could assess a trade’s performance during the course of the day and, when it was recorded, allocate trades that benefitted from favourable intraday price movements to one fund and trades that did not to other funds.”

The trades fitted with the investment mandates and strategies for each product, but the discretion given to traders when buying specific instruments led to the conflicts of interest, the regulator said.

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In addition, the FCA reported that there was “no segregation of investment decision-making, order placement, trade execution, allocation and booking of trades”.

“Where firms do not segregate dealing,” the watchdog said, “it is essential that they implement adequate systems and controls to ensure that a compliant order process is followed… Despite this, there were significant deficiencies in responsibilities, policies and procedures, systems, management information, [and] culture.”

In the period covered by the FCA’s investigation, August 2005 to June 2013, £27.4 million was paid out to Aviva Investors’ traders through performance fees—although only two traders were involved in the malpractice. Both traders no longer work for Aviva Investors, and not all of the fees paid out were affected.

Upon discovering the practice in May 2013, Aviva Investors reported itself to the FCA and paid out £132 million to the affected funds in compensation for lost performance.

Euan Munro, Aviva Investors’ CEO, said the company accepted the regulator’s decision.

“We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged,” he said in a statement. “We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors.

“We have a clear focus on simple and specific investment outcomes for clients and we are delivering strong levels of investment performance within a robust control environment.”

Aviva Investors’ co-operation with the FCA resulted in a 30% discount on the fine, which otherwise would have been £25.2 million.

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