Longevity risk transfer takes many forms, GM offloads $26 billion pension liabilities

We’ve been saying for a number of years that the longevity risk transfer market has the potential to grow to a massive size given the amount of liabilities pension plans around the world are exposed to. Longevity risk transfer takes many forms as pension plans offload longevity risks via swaps, hedges, buy-in/out, annuities and reinsurance. General Motors have just demonstrated one in a big way and offloaded a huge amount of risk by transferring $26 billion of future pension obligations to Prudential.

This transaction is not typical of the longevity risk deals we cover on Artemis, but given the size of the deal we felt it worth highlighting. GM have signed an agreement with Prudential which will see the insurer assume certain salaried retiree benefit obligations as part of GM’s plan to reduce pension obligations by approximately $26 billion. Upon closing, which is expected by the end of the year, GM plans to purchase a group annuity contract from Prudential. Prudential will then assume responsibility for providing benefits to GM’s salaried retirees covered by the agreement, who retired before December 1, 2011.

“This landmark agreement allows GM to maintain the value of U.S. salaried pension benefits for its retirees while significantly reducing its pension obligations,” said Christine Marcks, president of Prudential Retirement. “With our financial strength, investment capabilities and actuarial expertise, Prudential is uniquely suited to assume the responsibility of guaranteeing pension benefits; it has been a core business for Prudential since 1928. We currently provide millions of Americans lifetime income security and look forward to fulfilling the promise of guaranteed lifetime income to these retirees.”

“These actions represent a major step toward our objective of de-risking our pension plans and will further strengthen our balance sheet and give us more financial flexibility going forward,” said Dan Ammann, senior vice president and CFO at General Motors.

Fitch Ratings spoke out and said that they see transactions like this which offload pension plan risk as “a positive step in reducing the risk of future volatility in the company’s cash pension obligations”. Fitch said that this is the first time a pension plan of this size has been de-risked in such a way and this transaction could spark other companies to seek to repeat it to decrease volatility in their pension liabilities. The transaction allows GM to benefit from a decline in exposure to the longevity risks tied to plan participants who are included in the deal.

One thing is for certain, eventually the capital markets are going to become a source of capital to fund longevity risk transfers and we’ll likely see rapid growth of risk transfers in swap or securitization form. Pension plans are waking up to the need to secure their future liabilities and remove volatility from them. Deals like this which move significant amounts of longevity risk from one party to an insurer will only increase the need for capital market support to transfer these risks in future.