Back in 2012, the U.S. defined-benefit (DB) pension world was lit up by news of two massive annuity purchases aimed at de-risking plan assets, by General Motors ($26 billion) and Verizon ($7.5 billion).
While the general trend toward annuity purchases has widened since then, no other plan sponsor has come close to completing an annuity purchase near the size of those two.
That changed on Tuesday, when FedEx announced a $6 billion annuity purchase transaction.
FedEx said it will purchasing annuities worth approximately $6 billion, or about 20% of the company’s U.S. plan obligations. The 41,000 retirees and beneficiaries that will be transferred represent about 15% of the roughly 270,000 participants in FedEx-sponsored U.S. DB plans. The reduction in headcount will save FedEx more than $3 million per year in PBGC flat-rate premiums alone.
While the contracts will be signed this week, retirees won’t start receiving checks from the insurer, MetLife, until August of this year. FedEx has been making significant discretionary contributions to its U.S. DB plans over the last couple years, to the point where the plans are likely fully funded. When it announced these contributions, FedEx cited tax benefits and funded the contributions with debt.
This particular annuity purchase is noteworthy for a few reasons.
First, no other single annuity purchase has reached the $6 billion level since the two jumbo deals by GM and Verizon in 2012. The next-biggest deals were by Motorola at just over $3 billion, then WestRock and Kimberly Clark at about $2.5 billion.
Second, MetLife has now publicly positioned itself as a player in the jumbo annuity purchase deals. Until Tuesday, the four largest single annuity purchases were made by Prudential. Now, MetLife owns the third-largest annuity purchase.
Third, FedEx could be setting a significant precedent for other DB sponsors on the pattern of risk and expense management. Some of them, while freezing their U.S. DB plans, have taken some important key steps to managing their risk.
Such steps include: allocations of more than 50% to liability-hedging fixed income (long credit, long government, and 20-plus-year STRIPS), discretionary contributions through debt to fully fund plans; lump-sum cash-outs to terminated vested participants; and lifting out a large portion of retiree populations through annuity purchases.
As the DB plan obligations represent more than half of FedEx’s market capitalization, priorities likely include a desire for a smaller footprint, lower funded-status volatility, and reduced expenses.
As we have previously stated, the largest U.S. DB sponsors — those that are part of the $20 billion club — set industry trends. The pattern we have observed with FedEx could soon be followed by others.
Given the recent increase in funded status, the incentives for sponsors to make discretionary contributions (new tax laws taking effect, PBGC premium increases, desire for risk transfer), and an ongoing trend toward interest-rate management, FedEx’s move could be a harbinger of renewed efforts by sponsors to de-risk their pension plans.
Some may view this as another signal of the decline of traditional pension plans. However, it’s important to note that DB assets are still on the rise, and nearly all recent major annuity purchase transactions have been for retirees only.
Annuity purchases for the remainder of plan populations — actives and terminated vested — remain relatively expensive and less attractive for plan sponsors. In other words, while sponsors will continue to chip away at portions of their plans, most have a long way to go in funding them up before full plan terminations become more commonplace.
Sponsors of frozen or mature closed plans that have taken steps to fund up and reduce risk through asset allocation and retiree annuity purchases could also be positioning their plans to enter into a hibernation state.
In hibernation, the goal is to significantly reduce funded status volatility and expenses through asset allocation and strategic risk transfer. That’s an effective strategy for sponsors desiring reduced risk exposure but for which plan termination is not immediately desirable or feasible.
As we have recently written, DB sponsors are signaling a pattern of de-risking. FedEx is the latest example of a clear movement in that direction.
Justin Owens is director of client strategy and research for Russell Investments.
Photo: Dan DeLong, Red Box Pictures