This is why you’re seeing many of them using the safety of annuities to shield themselves from pension liabilities and risks of the coming bear market taking back nine years of gains.
December 05, 2017
Yesterday (Dec. 4, 2017), Molson Coors transferred nearly $1 billion in pension liabilities to an annuity with Athene Annuity and Life Company, according to a report by “Pensions & Investments.” The $900 million amount represents almost a third of Molson Coors’ total pension assets.
Athene will assume responsibilities for making the monthly payments to more than 6,000 beneficiaries of the Molson Coors pension plan, reported “Business Wire,” beginning on May 1, 2018.
During the second-longest bull market in U.S. history, with expected rises pending on the passage of current tax legislation, why would Molson Coors choose to place this money in an annuity instead of maximizing its returns in the market?
As CEO/Founder of Denver-based Tucker Financial Solutions, Karlan Tucker reviews such financial news as part of a growing overall trend. “Corporations are often more sensitive to market risks than individual investors,” said Tucker. “This is why you’re seeing many of them using the safety of annuities to shield themselves from pension liabilities and risks of the coming bear market taking back nine years of gains.”
Pensions & Investments also reported that in November CBS Corp. transferred $800 million in its pension plan liabilities into a group annuity. CBS did not identify the name of the insurance company or how many retirees would be affected, but the transfer accounts for about 20% of the broadcaster’s total plan liability.
In a Securities and Exchange Commission notification last month corroborated by Pensions & Investments, Missouri-based Leggett & Platt, Inc. disclosed that it was planning to purchase a group annuity contract to transfer some of its $214.1 million total in pension plan assets. The purchase would take place in the fourth quarter and serve those retirees currently receiving smaller monthly benefits, in part, the company said, “…to reduce (the) volatility of contribution requirements.”
When Tucker reviews the large gap between most pension contributions and the full funding amount for the plans, he sees a flaw even a bull market is unable to resolve.
“One of the serious issues,” said Tucker, “is that pensions, in general, need a 7.5% return on investment to maintain funding levels. The market has delivered a 5.3% average annual return for the century beginning in 1900 and only 4.2% since 2000. To capture that additional 3.5%, many pension fund managers dramatically increase risk in the portfolio, which can backfire when the market dips, or worse, when a coming bear market with increased corporate bond defaults occurs, which in turn may trigger pension defaults.”
International Paper Company began revising its pension plan structure in 2004, when the Memphis company’s annuity buyout began. Since that time, the funded ratio of its plan has leveled near 80%, a testament to the ability of annuities to hedge inflation and steadily grow over time.
“We put together a comprehensive (liability-driven investing strategy) that allows us to have our cake and eat it, too,” Glenn L. Landau, CFO of International Paper, told Pensions & Investments. “We did quite well. We were able to come out with (a premium of) 98% of the PBO (Pension Benefit Obligation).”
Pensions & Investments reported that the LIMRA Secure Retirement Institute compiled data showing pension transfers to annuities of $4.1 billion just in the second quarter of 2017, well above the $1 billion for the same period in 2016. Additionally, the institute cites that industry experts are expecting a total of $18 billion to $20 billion by the end of 2017, compared to $14 billion in 2016.
Tucker sees the trend continuing: “Annuities are instruments for protecting your premium and eventually delivering income. What corporations are now doing isn’t dramatically different from what we advise our customers to do when we work on retirement plans with them. Many of the people we work with don’t have a pension paying them income or a lump sum. But they can still buy an annuity that, for a lump sum of cash, guarantees monthly income for the rest of their lives. Perhaps the best part is that while they receive their monthly checks they still own and control the lump sum they invested. In an earlier version of America, this is the role pensions used to perform.”
Karlan Tucker is the CEO/Founder of Tucker Financial Solutions in Littleton, Colorado. He is co-author of Brian Tracy’s new book, “Success in the New Economy,” scheduled for release in spring 2018. He has been interviewed nationwide as an expert regarding retirement planning on both television and radio. Since 1991, he and his advisory team have helped thousands of Coloradans successfully retire. Tucker Financial Solutions, a retirement planning financial advisory and investment firm, specializes in fixed index annuities, life insurance, asset management and college funding. Tucker Financial Solutions is part of the Tucker Financial Group companies that include Tucker Advisors, Tucker Asset Management and Tucker College Solutions. Karlan Tucker regularly reviews topics on investing, college planning and taxes, especially regarding their impact on retirement planning.
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