The Next Big Thing in the Pension Market…….Liability Settlements

Moderator: Krista Dietrich, VP Marketing Presenter: Jay Dinunzio, Senior Consultant

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Helping organizations effectively & responsibly transfer pension risk for over 30 years.

Pension Settlement Overview

Pension Settlement = Discharge of all or a portion of an employer's pension benefit obligation.

Irrevocable

Relieves pension benefit responsibility

Eliminates significant risk associated with obligation

Settlement Criteria

Purchase insurance company annuity

Offer voluntary lump sum payment

Funding

Demographics

Timing

Communication

Imp

ortan

t Co

nsid

eration

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Distribution Options

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For frozen DB plans: Question is less about

“IF”… more about

“HOW” & “WHEN”

Lump Sum vs. Annuity

Large one-time payment Flexibility to invest Preference of non-retired participants Must be actively elected Interest rate basis fixed annually Attractive option for unhealthy lives Distribution from plan trust Bottom line focused sponsor Election process complexity

Smaller monthly payments Guaranteed income for life Preference of current retirees Required default option if LSS is not elected Interest rate basis varies daily Attractive option for healthy lives Plan assets used to purchase group annuity

contract Paternalistic sponsor

Lump Sum Considerations

Annuity Considerations

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Settlement Costs By Employee Group

Election Rates

Anti-selection costs

Inter-year Interest rate changes

Settlement threshold

Plan amendments

Private letter rulings

Service provider support

Actual costs will vary based upon lump sum and annuity rates in effect at time of settlement

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100%

110%

115%

100%

120%

100%

125%

50%

100%

150%

~% of Current GAAP PBO

Retiree Lump Sum

Retiree Annuity (no lump sum offered)

Retiree Annuity (lump sum offered)

Term Vested Lump Sum

Term Vested Annuity

Active Lump Sum

Active Annuity

Term Vested

Active

Mortality Anti-selection Risk

Retired

Settlement Costs Scenarios

Actual costs will vary based upon lump sum and annuity rates in effect at time of settlement

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Sample Plan: $30 Million Total GAAP Liabilities • 50% Retiree • 25% Term Vested • 25% Active

Annuities purchased for all retirees Lump sum offered to all non retired • 85% elect LSS • 15% elect or default to annuity

Lump sums offered to everyone • 100% elect LSS

Lump sums offered to everyone • 85% of non-retired elect LSS • 10% of retirees elect LSS

Annuities purchased for everyone • 100% annuities

Historically speaking, most common

approach

Retired Non-Retired Total

% of GAAP Annuities Lump Sum Annuities Lump Sum

- $ 15,000,000 - $ 15,000,000 $ 30,000,000 100%

$ 16,500,000 - $ 5,512,500 $ 12,750,000 $ 34,762,500 115%

$ 16,500,000 - $ 18,375,000 - $ 34,875,000 116%

$ 15,525,000 $ 1,500,000 $ 5,512,500 $ 12,750,000 $ 35,287,500 118%

Lower Settlement Cost Higher

Conclusions: Election rates & demographics drive economics Statutory lump sum rates vs. annuity rates can have added impact Specific plan provisions and other factors can influence election rates

Settlement vs. Plan Termination: Chicken or the Egg

Plan Termination event decision

drives one-time settlement events

Multiple settlement event decisions facilitate Plan

Termination event

DB Plan Liabilities

• Emerging view • “Don’t be all right /all wrong” • Diversified cost environment • Proactive

• Classical view • “All vs. nothing” • Undiversified cost environment • Reactive

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Large Companies Are Taking Action

Source: Pensions & Investments

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Best Candidates for Settlements

Pension

Settlement

Corporate

Mature plans

Non-union plans

Hard Frozen Focused on de-risking & exit planning

Financially flexible

Comfortable with accounting impact

Willing to invest resources to analyze and execute

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Lump Sum Costs

Insurance Company Annuity Quote(s)

Most Settlement Cost Assessment Precision

Next Steps / Recommendations

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Discuss settlement within pension committee meeting process

Consider your plan’s data integrity

Evaluate and engage service providers who can assist with developing a settlement strategy

Consider settling liabilities in advance of plan termination event

Strategic Monitoring of Settlement Cost Environment

Monthly barometer

High-level indication (not plan specific)

Index rises = settlements more attractive

Dynamic methodology

7 underlying components

Pension funding drives index (50% weight)

Easily tailored to plan specific funding levels

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Q&A

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