1 PENSION SETTLEMENT STRATEGIES The Challenge of Pension De-risking
2 Deutsche Bank Pension Risk Management. Strategic advice and innovative pension de-risking solutions. Best Bank Overall 2012 Best Bank for Longevity Risk 2012 ILS Deal of the Year 2011 Deutsche Bank s pension franchise is an industryleading, award-winning participant in the diverse and growing global pension de-risking market. leveraging Deutsche Bank s global capabilities across banking, capital markets, and institutional sales and capital markets experts across four continents. Our ambition is to continue providing innovative risk transfer solutions to corporate pension plans. Select Transactions BMW 3,000,000,000 Syndication of longevity risk to consortium of hedge counterparties Rolls Royce 3,000,000,000 Syndication of longevity risk to consortium of hedge counterparties February 2010 AEGON 12,000,000,000 Population-based longevity risk transfer January 2012 November 2011 Rolls Royce and Bentley Pension Fund, sponsored by Bentley Motors 500,000,000 Bespoke longevity swap syndicated to a reinsurance counterparty March 2013 Contact: Kevin Mclaughlin Director, Head of US Pension Risk Management +1 (212) Paul Puleo Managing Director, Head of Pension & Insurance Risk Markets +1 (212) Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities in the United States. Deutsche Bank Securities Inc. is a member of NYSE, FINRA and SIPC. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates Deutsche Bank AG. All Rights Reserved.
3 Sponsors Deutsche Bank Securities, Inc. 60 Wall Street New York, NY Kevin McLaughlin US Head of Pension Risk Management Evercore Trust Company, N.A. 55 East 52nd Street, 23rd Floor New York, NY William E. Ryan Managing Director & Chief Fiduciary Officer Contents WHY PENSION PLANS ARE WEIGHING SETTLEMENT OPTIONS 4 With pension risk a key balance sheet issue and last year s landmark deals much on their minds, plan sponsors are considering a variety of de-risking possibilities PREPARING FOR THE END GAME 9 When pension risk transfer or any pension risk management technique is in your sights, it is important to understand the work involved THE GROWING CHALLENGE OF LONGEVITY 14 The good news is that we re all living longer. The bad news is that longer lives pose more difficulties for pension plan sponsors MetLife 501 Route 22 Bridgewater, NJ Matthew V. Kasper, CFP National Director, U.S. Pensions NISA Investment Advisors, L.L.C. 150 North Meramec Ave., 6th Floor St. Louis, MO Gregory J. Yess, CPA Managing Director, Client Services Prudential 280 Trumbull Street Hartford CT Glenn O Brien Managing Director, Pension Risk Transfer Glenn.O Pension Settlement Strategies 3
4 Why Pension Plans Are Weighing Settlement Options It s been an interesting time to be a defined benefit (DB) plan sponsor. Interest rates have suddenly started moving up, and plan funded status has risen with them. Plans are beginning to hit liability driven investing triggers. Maybe this time plan sponsors will get serious about minimizing funding volatility. When it comes to de-risking, DB plans have a range of choices. What links these choices is a clear direction. For many plans, the goal is to ratchet down the funded status volatility of the pension plan, says David Eichhorn, Managing Director, Investment Strategies at NISA Investment Advisors. If this isn t done there is a risk to participants and a risk at an enterprise level that could require more contributions. Many of our clients are interested in a serious reduction of funded status volatility. Some may be thinking about offloading the plan to an insurer, and some may de-risk internally. DB plans aren t a growth industry. There are few plans that are active, open and growing. Many are closed or frozen. It s well understood that the growth in future pension assets will come from defined contribution plans. DB plans for so long have served as an invaluable benefit for workers and their families. However, because of changes in the economic costs of maintaining these plans, and administrative complexities, many large companies view them today as an albatross, says Norman P. Goldberg, Vice Chairman at Evercore Trust Company. These trillions still need to be managed. For corporate plan sponsors, the pension management task needs to be accomplished with the least effect possible to the corporate balance sheet. Companies have been trying to reduce the volatility of costs associated with running pension plans, says Ari Jacobs, Senior Partner and Global Retirement Solutions Leader at Aon Hewitt. The ultimate step in this process is to reduce liabilities by transferring them. Companies with larger liabilities as a percentage of market capitalization are more likely to be thinking about this those with pension liabilities of at least 20% to 25% as a percentage of market capitalization. The focus on pension risk transfer moved up a significant notch last year, with deals completed by Ford, GM and Verizon. The trend to pension risk transfer is being driven by the sheer size of obligations today, the cost of managing these funds and the associated funding volatility, says Kevin McLaughlin, Director and U.S. Head of Pension Risk Management at Deutsche Bank. It s this volatility that s of most concern to companies, particularly if the liabilities are quite large in relation to the balance sheet. The move to de-risk, as opposed to settling the assets, is well established. Pension plan sponsors are looking at de-risking actions, says Edward Root, Vice President & Actuary and Head of U.S. Pensions at MetLife. The pace picked up dramatically around 2008 with PPA and FAS 158, which increased funding requirements and brought pension plans closer to mark-to-market accounting. The recession, declines in equities and interest rates at the same time made for a perfect storm. Funded status has been very volatile since then. Interest in investment solutions such as LDI, which rely on identifying and mitigating risk, has grown dramatically. Defined benefit pension plan sponsors are surrounded by risk longevity risk, interest-rate risk, equity risk, says Rohit Mathur, Senior Vice President at Prudential. They are more aware of the risks they are carrying. Over the past 12 years, according to a Milliman study, the largest U.S. pension plans lost 30% of their funded status twice and are still carrying considerable pension deficits. They face rising contributions over time to close the funded status gap. ENTERPRISE RISK There s been a culture in corporate America to retain pension risk, says Prudential s Mathur. But plan sponsors are re-thinking that decision and realizing they should focus on managing their core business instead of their pension plan. As plans are becoming better funded, CFOs and treasurers are asking themselves whether their pension plan is the best place to take risk. Many are choosing to de-risk. It s been rather a long road to get companies to this point. Many first-generation LDI solutions were good programs, says Jess Yawitz, Ph.D., Chairman & CEO at NISA Investment Advisors. But the support from the CEO or CFO wasn t always there. Now we see pressure to de-risk coming from the upper floors of the building. Now plan fiduciaries are able to get the seal of approval to make changes to the plan to reduce funding volatility in advance. The impetus for this new focus on pension funding volatility doesn t just come from the plan sponsor. Analysts and rating agencies are now more savvy about the effects of a deficit in the pension plan, says NISA s Eichhorn. They know that the pension fund is a liability of the company, that underfunding is a form of debt, and that there can be large cash flow implications. That s really why pressure to solve this problem is coming down from the C-suite. STAKEHOLDER CONCERN There s been an escalation of stakeholder concern about pensions, says Prudential s Mathur. Shareholders, credit analysts and rating agencies are all looking at the impact of the pension on the company s valuation and capital structure. With this public spotlight on pension risk, companies are looking for ways to achieve contribution certainty and eliminate funding volatility so that they can put greater focus on their core business. Not all companies are affected equally by volatile pension funding ratios. Looking at pension plans industry by industry, says Deutsche Bank s McLaughlin, airlines can t handle the cost base of their plans. Big communications and technology companies are moving from an old tech to new tech world. Generous defined benefit pension packages in a low interest-rate environment are unaffordable in a competitive new tech industry. Industrial companies can often have pension obligations across many countries and these can be large in relation to other balance sheet items. Consumer cyclicals find that the pension cash needs can be highly correlated with the cash needs of their businesses, which can be problematic. Other industries are less af- 4 Pension Settlement Strategies
5 With pension risk a key balance sheet issue and last year s landmark deals much on their minds, plan sponsors are considering a variety of de-risking possibilities usually includes increasing fixed income allocations. Dynamic de-risking creates a glidepath for changing the asset allocations at pre-determined triggers. Lump sums became more attractive with the now phased-in change from a 30-year Treasury rate to a corporate bond rate for lump sum pricing. Finally, a pension buyout can involve a partial risk transfer for retirees only or a full risk transfer in conjunction with a plan termination. De-risking actions can be used separately, or they can be used together, either sequentially or at the same time. fected, but nonetheless may look to transfer risk within a few years. The fact is that for many companies a DB pension plan isn t workable in their current business model. I severely doubt that most shareholders would make a conscious decision to have a pension plan operating alongside their main business, says Scott Kaplan, Senior Vice President and Head of Global Product and Market Solutions for Prudential. In most cases a pension plan today does not help in attracting and retaining talent. In fact, a pension plan could be a management distraction. We view it as a risk management issue. A company needs to generate free cash flows. The pension plan is taking meaningful risk and often generating significant funding volatility. That can have the effect of diverting cash flows from core operations into the pension fund. While it is true that funding ratios are rising, it is also true that turbulent markets don t always have positive effects on pension plans, particularly if the assets and liabilities are not well matched. Changing the asset allocation will have a major impact on your funded status volatility, says NISA s Eichhorn. But market volatility going up will also make plan volatility rise. As interest rates have gone up recently, funded status has risen, but so has funded status volatility. ADOPTING LDI All decisions really flow from the choice of whether a company wants to continue to own its pension plan or not. In either case, the plan needs to prepare. There are five main types of de-risking actions, says MetLife s Root. You can change pension plan design, increase funding, change the investment strategy, offer lump sums or purchase a pension buyout. We ve seen many plan sponsors close or freeze their plans. Many have increased their contributions above the minimum required contributions, which can be paid for with cash, debt, or equity. The main investment strategy changes involve adopting LDI, matching assets closer to liabilities, which THRESHOLD OF ZERO RISK Quantifying an acceptable level of risk is key to the pension planning process. This is because it is never a foregone conclusion that the plan sponsor will eventually sell the plan. Pension plans can choose their risk level, says NISA s Eichhorn. But the key driver here is, What is the goal? If the primary goal is to reduce the plan s volatility and sponsor s enterprise risk, buyouts and LDI hibernation strategies may look substantially similar. It is possible to approach the threshold of zero funded status risk with LDI, without incurring the immediate payment and loss of flexibility required to offload the liabilities to an insurer. Transferring assets to an insurer isn t the only prudent solution to pension de-risking, says William E. Ryan III, Chief Fiduciary Officer at Evercore Trust Company. Over the next few years, if interest rates continue to rise and funding goes up, then the most affordable solution may be to de-risk the plan but continue to manage it under an LDI strategy. However, in a higher interest-rate environment, lump sums will become more expensive for the plans to pay, and given the interest-rate and general market performance, the need for plan sponsors to make large additional contributions to fund the plans should decrease, making annuitization a more attractive option for companies. This won t happen next year, but in the next three to five years, we expect more companies will be investigating this option. This investigation represents a sea change Pension Settlement Strategies 5
6 in the corporate approach to pensions. Thirty years ago, the world was viewed as simpler by pension funds, says NISA s Yawitz. It was considered to be an asset-only world. But things have changed. Funded status is more important than asset performance. It s important to understand the liability denominator. That has always been our focus at NISA. When LDI is initially adopted, the first phase is generally to lengthen duration of existing bond portfolios to increase the liability hedge. But for many sponsors it s not enough just to get a 40% or 50% hedge. And unless you re ready to allocate additional assets to fixed income, to achieve more hedge you need derivatives. In the current millennium, Yawitz continues, Many pension funds are systematically making an effort to implement LDI. Total funded status is driving actions by plan sponsors. Plans are buying more long duration physical bonds. We see plans with both explicit and implicit triggers based on interest rates or funded status. When those triggers are hit, the resultant steps are risk-reducing. If they contribute cash to the plan, it s used to buy long bonds. Over twothirds of our clients are invested in long duration bond benchmarks. HIBERNATING THE PLAN There s plenty of help available for corporate plan sponsors looking to weigh their options. These include the use of asset managers able to devise and manage a dynamic LDI strategy with an aim of gradually moving to full funding, hibernation or risk transfer to an insurer able to provide a variety of annuity-based alternatives. Looking at pension de-risking in general, we see three primary alternatives under current law, says Evercore s Ryan. The investment solution is LDI, which is a bond-heavy strategy that is often used in conjunction with a frozen plan, or even in active plans. The second alternative is using lump sums to settle payments to former participants. The third alternative involves using a fiduciary to help in the annuitization of all or part of the liabilities. Under ERISA, these annuities need to be provided by a U.S. insurer. To even contemplate a pension settlement strategy, a company needs to have a fully or more likely overfunded plan. Companies have the option to raise debt and use the cash to plug the pension funding gap, says Prudential s Mathur. We don t have a crystal ball, but we do expect that more companies will do this. When the plan is fully funded, companies have more choice in terms of how to manage this risk and whether risk transfer makes sense. We are certainly preparing for more companies to make that choice. Largely a corporate finance decision, it can be complicated to make these kinds of decisions, Meeting the Fiduciary Responsibility Pension risk transfer raises some specific fiduciary issues. But there are tried and true ways to handle the challenges All plan sponsors are aware of their fiduciary duties. The duties of a fiduciary include loyalty and reasonable care of the assets within custody. All of the fiduciary s actions are performed for the advantage of the beneficiary. In the case of pension risk transfer, there is a heightened sense of fiduciary duty, so much so that in some cases plans hire independent fiduciaries as part of the process. To understand the nature of the roles and responsibilities imposed on a company by its pension plan, it pays to reconsider how the situation works in the normal course of business. In a corporate pension plan, the company is both sponsor and fiduciary, with this role usually executed via an investment committee. When it comes to pension risk transfer or the decision to sell both the assets and the risk of the pension plan to an insurance company, these roles may need to be divorced. The decision to terminate a plan and go forward with annuitization is the plan sponsor s, says Norman P. Goldberg, Vice Chairman at Evercore Trust Company. The implementation decisions are made by the fiduciary. There is some disagreement as to whether you need an independent fiduciary, but the largest companies have found it more desirable to use an independent fiduciary. Under the Department of Labor s Interpretative Bulletin 95-1, which provides guidance on this process, the company sponsor becomes the settlor or the entity that settles the plan with the insurer. This reflects the corporate finance nature of the decision. The fiduciary, which may or may not be the plan s investment committee or a member of the treasury staff, then makes the decision as to which insurer should be chosen. LIMIT CONFLICTS Examples of potential conflict are already apparent, with Verizon s recent decision to sell its plan as perhaps the most clear-cut. Look at the Verizon sale to Prudential for a $7.7 billion premium payment, says William E. Ryan III, Chief Fiduciary Officer at Evercore Trust Company. It was plain vanilla in terms of benefits and the benefits mimicked those of the plan originally. From a plan design perspective, it was very straightforward. But the plan sponsor was sued. Did the fiduciary act appropriately? Verizon had its settlor hat on when it decided to terminate the plan. Under ERISA, the settlor can adopt, design or end a plan. In this case, Verizon was the settlor, not the fiduciary. The company appointed an external, independent fiduciary to do the due diligence and choose the insurance company to provide the annuities, which provides some clear advantages in managing any litigation risk. The six factors cited by the DOL in its guidance are: the quality and diversification of the insurer s investment portfolio, including measures of volatility the size of the annuity contract in relation to the insurers book of business the capital and surplus of the insurer the lines of business of the insurance company, as some types of products may be seen as more volatile/posing greater risks to the solvency of the insurer than others whether the annuity is supported by the general account of the insurers, in separate accounts a comparison/consideration of PBGC versus state insurance guaranty fund coverages Two things are important to consider, says Evercore s Ryan. First, these are examples of factors to be considered, and not an exclusive check-the-box list. Second, these factors don t always give a clear trend to consider, and need to be carefully weighed and balanced. Ultimately, the fiduciary decision needs to be made for the benefit of the plan participants. Fiduciaries should make sure that the solution is secure, says Kevin McLaughlin, Director and U.S. Head of Pension Risk Management at Deutsche Bank. If they follow the safest available annuity standard, this should be covered. The standard is very sensible. Jumbo deals will operate as M&A deals, rather than a technical process. even at a time when companies are flush with cash. Companies need to weigh the pros and cons, says MetLife s Root. What is the cost of filling the funding gap? What are the other uses for that cash in the company? What is the difference between the accounting and economic liability? FROZEN, NOT THAWED Different corporates will face different pressures, says Deutsche Bank s McLaughlin. Some will look at running an in-house solution, working the assets more. If you have a large in-house asset management capability, you can do this. continues on page 8 6 Pension Settlement Strategies
8 Or you can appoint specialist managers. Others will look to get the plan off the balance sheet, using cash to do it. The decision between keeping the plan or selling it also requires a cost-benefit analysis. The consideration is the delta between the GAAP liability and the cost of the insurance buyout, says Deutsche Bank s McLaughlin. Should I pay that delta? And if yes, how should I finance the cost? Should I use cash or raise debt, and how will the market view the transaction? What is clear, though, is that fewer companies are opting to keep their DB plans open and active. Some of our clients are going down the road from open to closed, says NISA s Eichhorn. They are looking to reduce the risk profile of the pension plan, perhaps considering a full de-risking or sale. Others are more blunt. Once a plan is frozen, it rarely thaws, says MetLife s Root. A plan freeze is often a tacit admission that the plan will terminate. The question becomes when and at what cost. We do expect to see an eventual rush to the door to insurers and a queue building as plans become fully funded, says Evercore s We may need new solutions if the insurance industry can t write enough annuities to meet demand Ryan. Insurers will price and make available these contracts according to risk and capacity. Fiduciaries judging whether or not to use annuities may be concerned not only about this queue, but also about the financial stability of the ERISA pension insurance program through the PBGC. As stronger and more fully funded/less risky plans annuitize, they no longer need to pay PBGC premiums, reducing a significant source of PBGC funding. What we are concerned about is that these two factors will feed upon one another, and exacerbate the significant financial challenges facing the PBGC and pension insurance system for the remaining covered plans. These questions are coming to the fore, as the annuitization options gain traction at the large end of the DB pension market. In 2012, we saw the big three transactions, says Aon Hewitt s Jacobs. Ford used lump sums to settle a portion of their retirees and terminated vesteds; GM used lump sums for certain retirees and then purchased annuities for those that were left; and Verizon purchased annuities for retirees. These are representative of the many different varieties of segmenting the population and the settlement solutions. There s plenty of potential for more pension settlement deals. There are still up to $3 trillion of liabilities in the U.S. DB market, says MetLife s Root. In the next five years, we expect to see a giant move to transfer risk. The market is very robust, but yet it could still take up to 20 years to fully de-risk. And though capacity may become a problem, demand does not yet outstrip supply in the insurance industry. We see capacity of at least $30 billion to $40 billion a year in buyouts, says MetLife s Root. The capacity could rise to $100 billion a year, if there are new entrants to the market. Insurers may also partner with reinsurers to grow the market. Insurers and asset managers disagree about where the pressure points are in the market. At the jumbo end, there are only a few insurance companies who have capacity and expertise for these types of deals, says Scott Kaplan, Senior Vice President and Head of Global Product and Market Solutions for Prudential. The size of the long-dated corporate bond market is more of a constraint for pension plans than insurance capacity. Although the big pension risk-transfer transactions get press, many plan sponsors are merely considering their options rather than doing deals. The trend of de-risking is fairly well-established, with several strategies to choose from, says NISA s Eichhorn. Annuity purchases are one end on a spectrum. And while they will remain attractive for some, we don t expect the majority of DB plans will choose the annuity route. It is possible that the optics of a buyout may be better, says NISA s Eichhorn. We did some work after the recent large deals about the effect on a sponsor from an enterprise risk perspective. It was very, very hard to discern a difference between annuitization and complete internal de-risking except on price. In a buyout, there is a signal to the market of the commitment to derisk, and this may be worth the price to some. When de-risking internally, the company doesn t have to come up with the cash on day one. Optics from a corporate finance standpoint may be enough of an incentive for some companies, but other observers point to the attractiveness of annuity deals for participants, who may have concerns about the ability of their company to keep up pension payments far out into the future. Risk transfer can be good news for retirees because it ensures the security of their benefits, says Deutsche Bank s McLaughlin. A pension buyout isn t the only solution. It is possible to do a lift-out, where only a segment of the population is subject to buyout. It is also possible to do a buy-in. When a company uses a buy-in, says Prudential s Mathur, the assets remain in the pension plan. In a buyout, the assets and risks are transferred to an insurance company. This transfer triggers settlement accounting and removes the pension plan from the balance sheet. The attractions of annuitization versus hibernation aren t lost on managers. Annuitization is an option, but for most of our clients, it s not the main end play, says NISA s Yawitz. Hibernation is a strategy that meets a number of corporate finance criteria, namely very low funded status volatility, but it may require the use of derivatives. Many of our clients that can t get enough duration or fixed-income sensitivity in the physical markets are using derivatives to increase their LDI hedges, continues Yawitz. Most of our $70 billion notional in derivative positions represents overlay strategies with these LDI clients. We feel we are a leader in using derivatives interest-rate swaps and swaptions - in duration extension programs. Keeping the plan in-house does leave sponsors with more options as far as asset allocation goes, although some are rarely used. An internal de-risking means that a company retains the option to re-risk, says NISA s Eichhorn. This can mitigate the need for contributions, while still continuing to execute a path toward hibernation. The plan would then sell risk assets as funded status improves. A candidate to re-risk may be 80% funded, but already divested of most of its risk assets, says NISA s Eichhorn. It may decide to re-risk, if the risk/reward trade-off is favorable. It could be a tactical view that you take if you think risk assets are oversold. ACCELERATE PLANS The hibernation strategy may be an end in itself, or it may be a stepping stone. We know that a whole host of companies do not want to transfer their pension plan, says NISA s Eichhorn. But no matter which camp you are in, the hibernation strategy is a great way to get the plan to the lowest level of risk while you consider a transfer. All the clean-up you need to do to the portfolio before transferring takes time. By having a hibernation portfolio, you can be sure that the swings in markets won t erode funded status. The current market environment makes all of these discussions ever more relevant. In the first six months of 2013, interest rates increased 80 basis points, says Deutsche Bank s McLaughlin. Many more U.S. corporations will be fully funded. But it happened so fast that most companies haven t had time to react. But it s very significant. Given all the pain, this will very obviously accelerate plans to de-risk. Depending on how the pension risk transfer market develops, the industry may have to adjust. We may need new solutions if the insurance industry can t write enough annuities to meet demand, says Aon Hewitt s Jacobs. There aren t any capacity constraints at the moment, but the barriers to entry into the mega-transaction market is significant, so new entrants will not come along too easily. 8 Pension Settlement Strategies
9 Advertising Supplement Preparing for the End Game When pension risk transfer or any pension risk management technique is in your sights, it is important to understand the work involved P ension risk management is both an art and a science. But mostly it s a complicated process. No matter what the plan sponsor s ultimate goal is, it pays to understand all the steps involved in preparing the plan for pension risk transfer or any other long-term approach to pension management. Talk to any plan sponsor and asset management is often the focus of the conversation. What is the plan s approach? If it is using LDI, then what is the balance between the hedging assets and the return-seeking portfolio? And so on. But when it comes to thinking through pension risk transfer or other de-risking strategies, the place to start is the liability. It is important that the liability is mapped to the true market volatility, says David Eichhorn, Managing Director, Investment Strategies at NISA Investment Advisors. How much can it swing over a year? It is important to get the volatility of the liabilities fully calibrated when designing a hedge strategy. Plans may find they have more risk than expected. We have seen some common measures of risks significantly mis-estimate funded status volatility. Nailing down the liability has implications for all plans, no matter what the ultimate goal is. Pension plans that have existed for tens of years have been subject to revision and benefits changes, and that can make it difficult to assess liabilities. We think it is very important that you make sure you measure the liability correctly, says Jess Yawitz, Ph.D., Chairman & CEO at NISA Investment Advisors. The determination sits with the actuary and the consultant. But you want to make sure there are no disguised options, no caps or floors as there are in a cash balance plan, for instance. There is nothing worse than hedging the wrong liability. DATA REQUIREMENTS There are practical aspects to the prospect of transfer. The administrative effort is as important as the liability health check. Getting the liabilities into a fit state is the most time consuming part of the process, says Scott Kaplan, Senior Vice President and Head of Global Product and Market Solutions for Prudential. It can take several months to ensure the quality and state of your data. For plan transfer, readiness is essential, says Ari Jacobs, Senior Partner and Global Retirement Solutions Leader at Aon Hewitt. The census data requirements are higher than the plan has seen in the past. Plan documents need to be ready and possibly amended as needed. And importantly, plan sponsors need to understand the liquidity of their asset base. For jumbo buyouts, there s an investigation phase, where the plan works with its advisors, says Edward Root, Vice President & Actuary and Head of U.S. Pensions at MetLife. This can take over a year. Next, a feasibility study will involve reaching out to insurers to get preliminary indicative pricing. Then the plan needs to figure out their de-risking strategy such as doing a buyout with lump sums or a buyout only. This phase would include sharing asset and mortality information and serious pricing. Finally, the execution phase takes three to six months. Some practitioners suggest that the complexity of these transactions is on a par with an M&A deal. Terminating a plan and transferring the assets is a collaborative effort, says William E. Ryan III, Chief Fiduciary Officer at Evercore Trust Company. Many parties are involved. The plan sponsor needs to double check the plan funding status, which can be more complicated that it sounds. It needs HR and recordkeeping to check who is covered, and clear, comprehensive information about all the covered participants. This information then needs to tie back with the actuary s calculations of the plan s accrued liability and what you will be transferring to the annuity provider (including projections on any cost of living or similar benefits that need to be taken into account). This level of due diligence is on a par with, and in some measure much harder, than that for mergers and acquisition activity. FINANCIAL STRENGTH Pension risk transfer is a highly regulated activity. The insurance company selection process for a buyout is governed by DOL Interpretative Bulletin 95-1, says MetLife s Root. It s a welldocumented process. This bulletin provides a road map for a penpension Settlement Strategies 9