When General Motors Co., Detroit, purchased a group annuity contract from Prudential Insurance Co. of America to transfer $29 billion in U.S. pension plan liabilities in 2012, it showed plan sponsors a path to take derisking to the next level.
Scott Gaul, Avon, Conn.-based senior vice president and head of investment and pension solutions at Prudential Financial, said in a phone interview that the insurer had been strategically looking at opportunities around 2008.
Corporations had been moving away from offering DB plans for years, and some of the largest, such as Amazon.com Inc., Apple Inc., and Microsoft Corp., never offered a DB plan.
Two bills led to the rise of 401(k) plans to the detriment of DB plans. First, there was the passage of the Tax Reform Act of 1986, which overhauled vesting, integration and coverage rules for defined benefit plans. The law motivated many newer employers to gravitate toward 401(k) plans, and Pensions & Investments even ran an editorial in the Oct. 13, 1986, edition that stated: “Defined benefit plans slowly dying.”
Then, the Pension Protection Act of 2006 sped up the time over which companies had to amortize deficits to their DB plans, adding the requirement of additional contributions by “at-risk” plans, encouraged automatic enrollment in 401(k) plans, and perhaps most notably, placed pension assets on corporate balance sheets.
The law, along with the effects of the 2007-2009 financial crisis, heightened considerably the appeal of derisking. For GM, which in 2012 had by far the largest defined benefit plan among U.S. corporations, that appeal was considerable. The automaker had emerged from a turbulent era that saw it survive its June 2009 bankruptcy filing, and in April 2011, GM named Daniel Ammann as senior vice president and chief financial officer. Before joining the company, he had been managing director and head of industrial investment banking for Morgan Stanley.
Mr. Gaul said that investment banking background had provided Mr. Ammann with the realization of how significantly the pension plan affected the company’s overall balance sheet.
First, the automaker announced in February 2012 that it would freeze the defined benefit pension plans of all salaried workers hired before 2001. Effective Oct. 1 of that year, those salaried workers would be moved to an existing 401(k) plan for salaried employees.
Then, in June of that year, GM announced it would offer a lump-sum payment to 42,000 retirees in its U.S. salaried pension plan and also would purchase a group annuity contract with Prudential to transfer the liabilities of another 76,000 U.S. salaried retirees.
GM said in a fact sheet distributed that month that its U.S. pension obligation had represented 337% of the company’s overall market capitalization as of Dec. 31, 2011. Its 10-K filing said total U.S. defined benefit plan assets as of that date totaled $94.349 billion, while projected benefit obligations totaled $108.562 billion, for a funding ratio of 86.9%.
Ten years later, according to GM’s most recent 10-K filing, U.S. defined benefit plan assets totaled $59.921 billion, while PBO totaled $60.208 billion, for a funding ratio of 99.5%.
Those liabilities currently represent about 120% of GM’s current market capitalization, but the automaker has shown no signs of revisiting the pension buyout market in the past decade.
Christine Gonyea, GM’s senior tax counsel, and Angela Santiago, GM’s director of investment services, could not be reached for comment.