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Analysis: U.S. companies take aim at pension risk with lump-sum offers

By Jilian Mincer

NEW YORK (Reuters) - Corporate America is finally ready to deal with a monkey on its back: massive pension obligations.

AT&T Inc on Friday said it plans to contribute a $9.5 billion stake in its wireless business to its underfunded pension plan. Earlier this week, Verizon Communications Inc moved to unload $7.5 billion in pension obligations to insurer Prudential Financial Inc.

But by far the most common trend in corporate America is to offer lump-sum payouts to thousands of retirees now - these voluntary buyouts could cost companies millions of dollars upfront, but they eliminate the risk of obligations soaring out of control in the future.

General Motors Inc and Ford Motor Co kicked off the trend earlier this year, and they have been joined this earnings season by companies ranging from Taco Bell and KFC owner Yum Brands Inc to tissue maker Kimberly-Clark Corp.

Companies "have been de-risking to manage the volatility of their (pension) assets," said Ari Jacobs, senior partner and Global Retirement Solutions Leader at Aon Hewitt. "The logical next step for organizations is to move liability off the balance sheet."

For years, plan sponsors have been squeezed by lower investment returns and higher costs for retiree benefits, which have forced companies to top up pension plans.

For instance, Sears Holdings Corp in September contributed $203 million to its pension plan to make it at least 80 percent funded.

In July, the average U.S. corporate pension was only 71.4 percent funded, according to BNY Mellon, the lowest level since the firm began tracking this information in December 2007.

By offering voluntary buyouts, companies expect to protect their balance sheets "from future volatility and future fluctuations," said Rick Jones, a managing partner in Aon Hewitt's Retirement Consulting practice.

Kimberly-Clark recently notified about 10,000 former workers not yet receiving retirement benefits that they would be eligible for the lump sum distribution.

"It takes some of the volatility out of the pension plan going forward," said Bob Brand, a spokesman for the company.

In the case of Verizon, it aims to remove a quarter of its pension burden with a single upfront payment to Prudential, a deal known as pension terminal funding. The full terms have not been finalized, but Verizon has said it would inject $2.5 billion into its pension plan prior to closing.

WHY NOW?

Even before the financial crisis, many U.S. companies had stopped offering defined benefit pension plans, especially to new workers. Companies preferred 401(k) plans, where the burden - and risk - is on the employee to save and invest. During the financial crisis, some companies slashed their contributions to 401(k) plans.

And now, firms eager to move the defined benefit plans off their balance sheets are encouraging retired and other former workers to take a voluntary payout.

"We've seen a high level of interest this year, and I think you'll see it next year and beyond," said Alan Glickstein, senior retirement consultant at Towers Watson in Dallas, Texas.

In a survey released earlier this year by Aon Hewitt, 35 percent of about 500 large American employers expect to offer a lump sum payout.

Companies - many of which had been on the fence about making changes - are beginning to believe that interest rates will not rise in the near future.

Low interest rates mean lower returns on the investments companies use to pay their obligations; if the companies assume rates will not rise anytime soon, they have to rethink how they plan to meet those obligations.

A company must notify employees when its pension fund's asset value dips below 80 percent of obligations. When that happens, companies can only make lump sum distributions equal to half the benefit owed to workers. The other half has to be in the form of an annuity.

Archer Daniels recently began notifying vested former workers they are eligible for the payout. Depending on uptake, ADM estimates it could "reduce its global pension benefit obligation by approximately $140-$210 million and improve its pension underfunding by approximately $35-$55 million."

Yum said in its filings that it is making a similar decision "in an effort to reduce our ongoing volatility and administration expense." Funding would come from existing pension assets. It expects a pre-tax non-cash charge between $25 million and $75 million in the fourth quarter of 2012.

Historically, the vast majority of people, when offered a lump sum payout, have taken it instead of waiting for a pension check. That rate has fallen slightly since the recession as workers have grown reluctant about managing their own funds.

"We hope people think really carefully about the decision," said Nancy Hwa, a spokeswoman for Pension Rights Center, a consumer organization in Washington, D.C. "It's very easy to be tempted by this large sum of money initially, and it's easy to spend it on something other than retirement."

(Reporting By Jilian Mincer; editing by Edward Tobin and David Gregorio)

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