and that’s bad news for some companies’ bottom lines.
As pension plans incorporate new life-expectancy estimates into their calculations, investors are glimpsing the financial fallout from aging societies.
AT&T last month absorbed a $7.9 billion noncash charge from rising pension costs, including retirees’ longer life spans. At Northrop Grumman, updated mortality estimates boosted its pension obligations by $1.8 billion to $30.5 billion, while shareholders in International Business Machines saw their equity shrink by around $6 billion after the company recalculated its pension bill, in part because of the mortality changes.
“2014 was a tough year for pension plan sponsors,” said Matt Herrmann, a senior consultant for Towers Watson in St. Louis. “Folks are going to continue to live longer. That means a significant increase in pension liabilities.”
To avoid ballooning costs from years of additional pension checks, some companies are paying insurers to take over their plans. Life insurers see the longevity deals, which expose them to financial risk if people live too long, as balancing their existing exposure to paying if customers die too soon.
In September, Motorola Solutions cut its pension obligations by $4.2 billion by transferring responsibility for 30,000 retirees to Prudential Financial and offering others lump sum payments. Now, if Motorola retirees live longer, Prudential will be on the hook, not their former employer.
Dozens of additional deals are likely this year. In a MetLife survey of 228 pension plans, 29 percent said they are considering similar transactions over the next two years.
‘DEATH DERIVATIVES’
Demand for such pension risk-transfer deals eventually will eclipse the insurance industry’s capacity and provide an opening for investment banks to sell securities known as “death derivatives,” some experts say.
“The capital markets are going to have to come in because there’s not enough capacity from insurers and reinsurance companies,” said Rosemarie Mirabella, assistant vice president for A.M. Best Co., a global credit-rating agency in Oldwick, N.J.
Before the financial crisis, investment banks such as JPMorgan Chase and Morgan Stanley joined an industry association designed to promote standardized securities that would package the risk of pensioners living longer than expected. Such longevity bonds could appeal to sovereign wealth funds, hedge funds and endowments looking for investments that aren’t correlated with other asset classes.
Deutsche Bank completed the first longevity deal involving third-party investors in February 2012. In a $13.6 billion swap with Aegon, a Dutch insurer, Aegon paid Deutsche Bank a fee to assume some of its pension risk. The bank then sold the risk to investors, who receive a floating payment from the bank based on how quickly pensioners die relative to an index.
NEW ASSUMPTIONS
The pension risk market won’t really take off until interest rates rise and make such deals less expensive.
The trigger for corporate pension plans to update their life span assumptions was the October release of new mortality tables from the Society of Actuaries in Schaumburg, Ill. Starting in 2009, society researchers pored over private pension plan data on 220,000 deaths and 10.5 million life-years, said Dale Hall, the society’s managing director for research.
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