By Bill Broich
What does glass, toilet paper and cell phones all have in common? The answer is this; 3 large American companies have turned to annuities to offset uncertainty in their pension obligations.
PPG Industries, Kimberley Clark and Verizon are only 3 examples of large companies buying their way out of unknown future pension obligations. In other words, they outsourced the responsibility. In doing so these companies were able to corral much of their future pension expenses into one payment. From then on it was someone else’s problem. Once they wrote the check, they could legitimately know their future obligation, their responsibility was over.
In the case of PPG, their pension fund had liabilities of $5.35 billion and only assets in the pension fund of $4.63 billion. The difference between what is owed to those retiring (and retired) and what was available, would have been PPG’s problem. Since people are living longer, it was impossible to accurately estimate the liability. By outsourcing the responsibility to companies who deal with these issues, the problem was solved (or passed on).
Is it ok with the employees (and retirees) of PPG? Sure, all they want is what was promised and the companies handling that obligation (MetLife and MassMutual) are certainly able to fulfill their new assumed obligations.
What is the end result of this action?
Obviously, PPG stock will rise and retirees are no longer concerned about pension payments. One large “other” benefit to PPG is they have now reduced their obligation to the federal program, the Pension Benefit Guarantee Corporation (PBGC) by lowering the cost of their pension obligations. Payments were required to be paid to PBGC to help cover any cost of failure with all pensions nationally.
What is currently happening in the movement of de-risking will be common practice. Let those who know how to provide retirement benefits (annuity companies) shoulder the burden, the stockholders will love it, it looks like a win/win deal.