Prudential Financial Inc. will take over the pension
responsibilities for 30,000 retirees at Motorola Solutions Inc., in
the latest big deal in which a corporation offloads to an insurer
some of the risks of running an old-fashioned pension plan.
As part of the deal, the monthly benefits paid to the retirees
will remain the same.
Motorola has agreed to purchase from Prudential a "group annuity
contract." Motorola will transfer about $3.1 billion in U.S.
pension liabilities and their risk to Prudential, and it also will
hand off a portfolio containing approximately $3.1 billion of bonds
and other assets, company executives said.
Prudential will use the portfolio to generate cash to cover the
retiree payouts and a potential profit of undisclosed amount.
Motorola also will offer up to $1 billion in lump-sum payments
to many other plan participants, the company announced Thursday
morning. The combined actions are expected to roughly halve the
company's current U.S. pension obligation, to about $4.2 billion
from about $8.4 billion, Motorola executives said.
The Schaumburg, Ill., company is following in the footsteps of
General Motors Co. and Verizon Communications Inc. in seeking to
limit exposure to interest-rate risk and the possibility of poor
investment returns. Those can cause large, unexpected cash funding
requirements, reducing capital available to invest in core
operations, company officials, analysts and consultants said.
In transactions also done with an insurance unit of Prudential,
the landmark GM transaction in 2012 covered 110,000 retirees and
approximately $25 billion in liabilities, while the Verizon one
several months later involved 41,000 retirees and about $8 billion
in liabilities, according to Prudential.
Since then, industry analysts and consultants have anticipated
more so-called pension-risk-transfer deals, saying it represents
one of the greatest growth opportunities for big and financially
strong life insurers.
To find an insurer to work with, "we ran an incredibly robust
process with a number of leading insurers, and there was very, very
strong interest," Rob O'Keef, Motorola's treasurer, said in an
interview.
A recent run up in the stock market and rising interest rates
that reduce the value of future pension payments to retirees are
providing companies with more flexibility to move employee-benefit
costs off their books, said people who advise companies on these
options. Many companies also face rising, required insurance
premiums from the Pension Benefit Guaranty Corp., as well as an
increase in liabilities stemming from longer-living retirees.
"Without a doubt, a large proportion of corporate America wants
to exit the pension business over time," said David Oaten, chief
executive officer of Pacific Global Advisors, which advises
institutional investors.
The transfer of liabilities to a life insurer generally takes
place when a company's plan is close to having enough assets to
cover all future obligations. As of June 30, investments in the
average company's pension plan were enough to cover 86% of these
obligations, according to J.P. Morgan Asset Management. That is up
from 77.8% at the end of 2011.
"Stars are aligning for more companies to do this," said Caitlin
Long, head of corporate strategies group at Morgan Stanley, who
advised Motorola on this transaction and helped GM and Verizon with
their pension transfers. "With interest rates off their lows and
stocks at highs, corporate pensions are fairly well funded."
"You are seeing a trend over time," said Phil Waldeck, senior
vice president at Prudential's retirement unit. "It is a global
trend and not just a U.S. trend."
Still, the moves worry some retirees because their benefits no
longer carry a backstop from the Pension Benefit Guaranty Corp.
Should Prudential encounter severe financial problems, shortfalls
in payouts would be handled through state-mandated guaranty funds
that are financed by the insurance industry.
Motorola said it aims to make up to $1 billion of lump-sum
payments available to a portion of the 50,000 plan participants not
covered by the Prudential deal, and expects the U.S. plan to shrink
by another 10,000 to 20,000 people this way. The company said it
plans to contribute $1.1 billion in cash to its U.S. pension plan
this year to further bolster it.
"We have substantially reduced the funding volatility associated
with our pension plans while protecting benefits for retirees,"
Gino Bonanotte, Motorola Solutions chief financial officer, said in
a statement. "Our retirees' benefits are not changing, just who
provides them."
The Motorola transaction is expected to be completed in 2014,
with Prudential assuming responsibility for benefit payments
beginning in 2015.
Write to Leslie Scism at leslie.scism@wsj.com and Dan
Fitzpatrick at dan.fitzpatrick@wsj.com
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