In 2012, the U.S. defined benefit (DB) world was lit up by news of two massive DB annuity purchases – General Motors (~$26 billion) and Verizon (~$7.5 billion). While the general trend toward annuity purchase has increased since then, no other plan sponsor has come close to completing an annuity purchase near the size of those two. That all changed yesterday when FedEx announced a $6 billion annuity purchase transaction.
What we know
FedEx is purchasing annuities worth approximately $6 billion, or about 20% of their US plan obligations1. The 41,000 retirees and beneficiaries that will be transferred represent about 15% of the roughly 270,000 participants in FedEx-sponsored US-based DB plans2. The reduction in headcount will save FedEx over $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 U.S. plan is likely fully funded. When they announced these contributions, FedEx cited tax benefits and utilized debt to fund the contributions.
Why this transaction stands out
This particular annuity purchase is noteworthy for a few reasons:
First, no other single annuity purchase has surpassed the $6 billion level since the two jumbo deals of GM and Verizon in 2012. The next closest deals were Motorola at just over $3 billion, then WestRock and Kimberly Clark at about $2.5 billion.
Second, MetLife has publicly positioned itself as a player in the jumbo annuity purchase deals. Until yesterday, the four largest single annuity purchases were sold by Prudential. Now, MetLife owns the third largest annuity purchase.
Lastly, FedEx could be setting a significant precedent for other DB sponsors on the pattern of risk and expense management. While they have not frozen their US DB plans, they have taken some important key steps to managing their risk, including an allocation of over 50% to liability-hedging fixed income (long credit, long government, and 20+ year STRIPS)3, discretionary contributions through debt to fully fund the plan, lump sum cashouts to terminated vested participants and lifting out a large portion of the retiree population through annuity purchase. As the DB plan obligations represent over 50% of the company’s market capitalization, a desire for a smaller footprint, lower funded status volatility and reduced expenses are likely paramount priorities.
What this could mean for the industry
As we have previously stated, the largest US DB sponsors – those we have discussed as part of the $20 billion club – set trends in this industry. 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 rate increases, desire for risk transfer, etc.) and an ongoing trend toward interest rate management, FedEx could act as the harbinger for a renewed effort by sponsors to de-risk their pension plans.
While some may view this as another signal of the decline of traditional pension plans, 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 plan, most sponsors have a long way to go in funding up their DB plans before full plan termination 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 – an effective strategy for sponsors desiring reduced risk exposure but for whom plan termination is not immediately desirable or feasible.
As we have recently written, DB sponsors are signaling a pattern of de-risking and FedEx is just the latest example of a clear movement in that direction.
1 Based on FYE 2017 10-k filing
2 Based on participant counts from 5500 filings
3 Based on FYE 2017 10-k filing