Lockheed Martin Corp. announced Tuesday it has transferred about $1.8 billion of its pension obligations to the Prudential Insurance Company through a buy-out agreement that uses a group annuity contract purchase to fund pension payments.
Lockheed is the latest major corporation to transfer its pension liabilities to insurers’ annuities. FedEx, Raytheon and Alcoa have purchased annuities in the past year to fund their pension obligations—a growing trend that some retirement experts say poses risks to a growing number of retirees.
Approximately 32,000 of Lockheed Martin’s retirees will now receive their monthly pension benefit payments from Prudential as part of the buy-out agreement, Prudential said in a press release.
“We are proud that Lockheed Martin chose Prudential to secure the pension benefits for some of its retirees,” said Peggy McDonald, a Prudential vice president who helped negotiate this agreement.
With pension funding at relatively high levels, pension risk transfer agreements such as this represent a major trend among companies with defined benefit plans. Such agreements enable these companies to reduce the risks, costs and liabilities of their pensions.
Spurred on by stronger funding ratios that being driven in part by rising asset prices and interest rates, more companies are finding themselves in a position to consider transactions to reduce pension liabilities. Such transfers can allow corporations to decrease the costs and risks associated with market volatility and longevity increases.
Scott Kaplan, the head of pension risk transfer at Prudential, said using annuities to fund pension obligations allows “companies like Lockheed Martin to better focus on their core operations and reduce risks.”
Currently, Prudential makes more than $10 billion in pension payments to more than 1 million retirees and their beneficiaries annually, including retirees from General Motors, Verizon, Motorola, Bristol-Myers Squibb, The Hartford, Kimberly-Clark, International Paper, Raytheon and J.C. Penney.
Pension transfers such as Lockheed Martin’s do not change the benefits that retirees receive; that’s because annuities, like traditional pension plans, provide guaranteed payments for life.
However, the regulation of pensions and annuities is different. Pensions are regulated at the federal level by the Employee Retirement Security Act while insurance and annuities fall under the jurisdiction of state regulation.