Execution of a Successful Pension Risk Transfer Transaction June 22, 2017 The contents of this document are proprietary and should not be duplicated or shared without express permission from Jones Day.
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PANEL Actuary, Moderator Transactional Counsel Administration, Marketplace Marcia Kelson George Flemma Jones Day Jones Day Ari Jacobs Partner Of Counsel Aon Hewitt Senior Partner Insurance Company ERISA Counsel Glenn O’Brien Kevin Noble Prudential Financial Jones Day Managing Director, Partner Institutional Investments 3
CAST OF CHARACTERS • Plan actuary • Outside counsel ‒ Performs accounting and funding calculations ‒ ERISA issues ‒ Develops mortality and demographic studies ‒ Transactional issues • Asset Managers • Plan administration ‒ Implements asset-in-kind strategy ‒ Communications to plan participants ‒ Implements hedging strategy as needed • Bidding Insurance Companies • Investment Banker ‒ Slate of potential insurers ‒ Leads fundraising if cash needed • Trustee ‒ Works with credit rating agencies as needed ‒ Transfers assets to pay premium • Independent Fiduciary • Internal Resources ‒ Represents interests of plan participants ‒ Primary: Treasury, Legal ‒ Also: Accounting, Finance, Communications, Investor Relations 4
PENSION RISK MANAGEMENT Why De-Risk Methods of De-Risking • Volatility of pension exposure • Limit Future Liability – Hard or Soft Freeze • Outsized pension liability; legacy obligation; stock price impact • Management of Assets within Plan • Rising PBGC premiums ‒ Liability Driven Investment (LDI) – asset/liability matching • Mortality table adjustments ‒ Annuity Buy-in – Mostly in U.K. • Focus on core business, not pension ‒ Longevity Swap – U.K. management • Elimination of Some or All Liability ‒ Lump-Sum Window ‒ Pension Risk Transfers • Lift Out or Spin/Term • Full Termination 5
PENSION RISK TRANSFER ANNUITY TRANSACTIONS BY YEAR Verizon and GM $35.3 deals signal shift to larger transactions 493 500 $16B $14.1 450 $14B $13.4 400 $12B Transaction Count 339 Total Premium 350 293 $10B 300 $8.6 247 243 237 235 250 $8B 194 200 180 $6B 150 150 $3.8 $4B $2.7 100 $2.3 $2B 50 $0.9 $0.8 $0.7 0 $0B 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 95 deals for $1.4B in first quarter 2017 compared to 82 deals for $1.1B in first quarter 2016 Source: Year-end 2016, as reported in insurer responses to Aon Hewitt Investment Consulting’s survey of the most significant U.S. insurers 6
PENSION RISK TRANSFER ANNUITY TRANSACTIONS BY INSURER DURING 2016 200 $6,000M 180 175 $5,055 $5,000M 150 Transaction Count Total Premium $4,000M 125 115 100 $3,000M 75 69 $2,020 $1,916 $1,776 $2,000M 50 33 $820 $1,000M 25 20 19 18 18 $517 $502 $447 $426 $363 $196 6 5 5 $75 2 0 $0M Insurer 1 Insurer 2 Insurer 3 Insurer 4 Insurer 5 Insurer 6 Insurer 7 Insurer 8 Insurer 9 Insurer 10 Insurer 11 Insurer 12 Insurers Included American General MassMutual Minnesota Life (Securian) OneAmerica Principal United of Omaha Banner (L&G) MetLife New York Life Pacific Life Prudential Voya (not bidding) 7 Source: Year-end 2016, as reported in insurer responses to Aon Hewitt Investment Consulting’s survey of the most significant U.S. insurers
JUMBO PENSION RISK TRANSFER TRANSACTION Chronological Order of Process: 1. Pre-Transaction Planning 2. Structuring 3. Bid Process 4. Transactional Tasks 5. Group Annuity Contract Issuance 8
PRE-TRANSACTION PLANNING INITIAL STEPS • Analyze Financial Impact ‒ Settlement Accounting ‒ Funding Requirements (i.e., is “Top-up Payment” needed?) • Coordinate plan investment strategy – LDI glide path • Establish Realistic Timeline • High-level quote / test of the market • Evaluate population scenarios ‒ Potential union considerations • Data Integrity ‒ Complete participant information is critical! • Birthdates, gender, beneficiaries, unique benefit issues • Beneficiary information is thorniest issue 9
STRUCTURING TWO PRIMARY APPROACHES FOR JUMBO DE-RISKING Spin/Term Lift-Out • Clear Legal Precedent • Legally permissible, but less affirmative precedent ‒ Spin-off actives and DVs into new, mirror plan ‒ Amend plan to require irrevocable annuity for specifically defined group ‒ Terminate old plan consisting of retirees only ‒ Comparable benefit notices ‒ Clear regulatory process • Likely top-up payment will be • Voluntary top-up payment to required maintain funding level • Independent Fiduciary • Independent Fiduciary • More common due to lower cost; less complexity *Spin/Term potentially more problematic with collectively-bargained units, but Lift-Out not completely free of union issues 10
STRUCTURING INDICATIVE TIMELINE MINIMUMS FOR JUMBO TRANSACTION Spin/Term Lift-Out • Day 0: Complete preparation • Day 0: Complete preparation • Day 0: Spin-off Date (IRS filing of spin-off • Day 0: Sign Definitive Purchase due 30 days before this date) Agreement with insurer • Day 0: Sign Definitive Purchase • Day 1: Notify participants of retiree lift out Agreement with insurer purchase, and individualized retiree benefit notices (comparable to those in • Day 1: Issue NOIT & NOPBs (required spin-term); SEC 8-K (if applicable) notice of termination and individualized benefit notices) • 45+ day interim period that mimics notice period in spin/term • Day 2: File with PBGC • Day 46: Close on annuity contract • Day 63: Exit PBGC 60-day review period • Day 46 + 6 months: Complete all mortality • Day 64: Close on annuity contract and data true-ups • Day 63 + 180 days: Complete all mortality *Specifics of timeline dependent on structure of deal and data true-ups 11
STRUCTURING BOTH APPROACHES END PARTICIPANT STATUS • Impact on plan participants is the same under either scenario • Provision in a terminating plan ‒ In a standard termination, annuity contracts must be available. ERISA § 4041(b)(3). • Provision in an ongoing plan ‒ In ongoing plans, an individual ceases to be a participant when the entire benefit rights of an individual are (1) fully guaranteed by an insurer, (2) enforceable by the sole choice of the individual against the insurer, and (3) a certificate is issued to the individual. 29 C.F.R. § 2510.3-3(d)(2). ‒ PBGC rule for premium purposes is similar. 29 C.F.R. § 4006.6(b)(2). ‒ Code rules do not treat distribution of an annuity contract as a cutback. 26 C.F.R. § 1.411(d)-4, Q/A-2(a)(3)(ii)(A) (source of payments is not a protected optional form of benefit). 12
STRUCTURING FIDUCIARY AND SETTLOR ACTS • Decision to terminate or amend a plan is a settlor act to which fiduciary duties do not attach. ‒ In termination context, because a plan covers more than just the target population, a pre-termination spin-off of active participants, etc., is necessary. Code “permanence” rule suggests that actives, and not the population to be annuitized, should be spun. 26 C.F.R. § 1.401-1(b)(2). ‒ In an ongoing plan, careful attention should be given to how the amendment is structured and to eliminate discretion as to certain annuitization decisions, like the population to be annuitized. • Implementation of a settlor act implicates fiduciary duties. ‒ In connection with an annuity contract purchase, the most important fiduciary act is the selection of the insurer or insurers to provide the annuity. See 29 C.F.R. § 2509.95-1 (Labor Department interpretive bulletin on the selection of annuity providers). ‒ Other items, like the terms of the annuity contract and communications surrounding the decision, also implicate fiduciary duties. 13
STRUCTURING EXECUTIVE LIFE AFTERMATH • In the 1980s, a large number of spin-off/terminations occurred in order to obtain reversions of assets from over-funded plans. • In the wake of the Executive Life Insurance Company failure in 1991, some courts denied standing to former participants who had ELIC annuities. See Kayes v. Pac. Lumber Co., 51 F.3d 1449, 1455 (9th Cir. 1995). • Congress amended ERISA to add a cause of action for former plan participants to bring suit for fiduciary breaches in connection with the purchase of an annuity contract. ERISA § 502(a)(9). ‒ Some courts have allowed such suits outside the section 502(a)(9) context. See Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000); Calobrace v. Am. Nat’l Can Co., 1995 U.S. Dist. LEXIS 13244 (N.D. Ill. Sept. 8, 1995). • The Labor Department also issued an interpretive bulletin regarding its views of the fiduciary duties attendant to an annuity provider selection. 29 C.F.R. § 2509.95-1. 14
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