Demand soaring for pension transfers to insurers prompted by Prudential decision

BOSTON/NEW YORK, Mon Jun 11, 2012 – Last week’s deal by Prudential Financial to take on $26 billion of the retirement liabilities of General Motors has reignited a part of the American insurance market that had been bouncing along the bottom in recent years.

But experts in the sector say GM’s splash was so big, there may be somewhat limited capacity for more mega-sized deals in the market for pension-risk transfers. Still, the market could be in the tens of billions over the next few years, they said.

A Reuters analysis of the pension obligations of the S&P 500 found that almost half of the companies with underfunded pensions have enough cash to spare to do a risk-transfer deal, including Rupert Murdoch’s News Corp and agriculture giant Archer Daniels Midland Co, suggesting there could be a scramble ahead for that limited capacity.

Known as pension terminal funding, the concept is simple: an employer pays an upfront premium to an insurance company for an annuity that covers all the members of a pension plan.

The insurer becomes responsible, via the annuity, for all of the retirees’ pensions and the sponsor gets to wash its hands of the obligation.

“Starting about a year ago it was the chatter, the chatter picked up … in the last six months, even in the low interest rate environment, transactions are starting to happen,” said Mike Devlin, the head of the Boston office for BCG Terminal Funding, which matches plan sponsors with insurers.

For years, plan sponsors have held off on buying single-premium group annuities to transfer risk, hoping that interest rates would rise from historically low levels, boosting the value of their assets and potentially filling pension gaps without extra cash.