Mayer Brown has an interdisciplinary team of lawyers who focus on the unique issues at the intersection of insurance, pensions and capital markets. As evidenced by recent pension de-risking transactions in the US involving GM ($26 billion), Verizon ($7.5 billion) and Ford (potentially $18 billion), pension de-risking by extinguishing plan liabilities is emerging as a critical theme among defined benefit (pension) plan sponsor companies of all sizes.
Over the past several years, plan sponsor concerns regarding volatility in pension obligations have been heightened by changes in accounting and funding rules, as well as by volatile capital markets, a low interest rate environment and longevity risk issues. Many defined benefit plan sponsors have frozen defined benefit plans to new hires or frozen benefit accruals completely. Some sponsors of both frozen and ongoing plans have sought to reduce the volatility of their pension obligations by pursuing in-plan investment strategies, which include the use of swaps and derivatives, as well as strategies such as “immunization” or “liability driven” investing—or the purchase of annuity contracts held by the plan as an investment. More recently, there appears to be increasing plan sponsor interest in the selective settlement of plan obligations through the use of “buy-out” annuities for, or offering lump sums to, certain segments of the plan population (both in the context of an ongoing plan or frozen plan or a spin-off/termination).
The implementation of de-risking strategies, including the structuring and negotiation of insurance contracts with respect to ongoing, frozen or terminating plans, offering lump-sum distributions to individuals in pay status, and the use of novel investments can be incredibly complex and, in addition to the difficult financial calculus, may involve insurance law, tax, qualified plan, accounting and ERISA fiduciary issues. Mayer Brown’s experienced team is uniquely positioned to advise companies interested in implementing such strategies.