Corporate America Keeps Dumping Pension Plans

(Photo Credit: Israel Andrade/Unsplash)
(Photo Credit: Israel Andrade/Unsplash)

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The few companies that still have traditional pension plans on their books can’t get rid of them fast enough. What that means for you, dear pensioner, isn’t entirely clear..

A record number of corporate pension schemes have been offloaded to insurance companies through the first half of 2023 in both the US and the UK, according to a Financial Times report on Thursday. The unique phenomenon is a near complete byproduct of — what else? — rising interest rates.

Pension Tension

Policy reforms and the rise of the 401(k) have turned corporate pension plans into something of a rare breed, at least in the US. And those that continue to live on — often closed to new employees — faced increasing tumult in recent years, especially in the pre-inflation era of ultra-low interest rates. Those rates of yesteryear inflated the value of liabilities and shoved scores of pension schemes into debt. But because pension plans’ assets generally consist of government bonds and highly rated corporate debt, today’s high interest rates are re-fueling scheme funding levels.

That’s effectively shifted the scales in favor of pensioners. Case in point: the UK’s Pension Protection Fund calculates that the collective deficit among the roughly 5,000 plans it monitors has shifted from roughly $166 billion in 2020 to a surplus of $542 billion today. The reversal of fortune has essentially resurrected the bulk annuity market, in which pension sponsor companies pay a premium to transfer some or all of their retiree obligations to eager insurance companies:

  • Roughly $22 billion of corporate pension liabilities were sold to insurance companies in the first six months of the year, according to the FT. The phenomenon has been driven by a series of $1 billion-plus deals, including one that saw AT&T offload $8 billion of obligations to Athene.
  • The UK, meanwhile, has seen over £20 billion ($25 billion) in pension obligations offloaded to insurance companies. Both figures represent record highs.

Last year, analysts at JPMorgan wrote in a note that over $750 billion of pension obligations in the $2.5 trillion sector will be passed to insurance players by 2030.

Heads Up: But wait a minute, who exactly benefits from these exchanges? For sponsor companies, the sudden change in fortune is an obvious balance-sheet relief. For insurers, getting paid to take on pension obligations represents an important new source of potential revenue. For actual pensioners, well, it’s still up for debate. Insurance companies must maintain minimum capital requirements, offering some baseline level of security. That’s good. But regulators and watchdogs have already warned about the industry’s capacity to absorb some schemes and its brazenness in stepping into a realm outside its core expertise. That’s bad. Oh well, it’s only a few million people’s entire life plans on the line.