Group annuity, lump sum plan to help Motorola unload pension liability

Motorola Solutions is incorporating a new group annuity and lump sum payment plan into the makeup of its traditional defined benefit plan that will help the communications company shave $4.2 billion in growing liabilities and benefit payments off its balance sheet.

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According to the agreement, the Prudential Insurance Company of America will assume responsibility for monthly pension payments to retirees. This will be achieved by shifting about $3.1 billion of liabilities, as well as 30,000 retirees to a group annuity plan being purchased by the Motorola Solutions Pension Plan.

“Our retirees’ benefits are not changing, just who provides them,” Gino Bonanotte, Motorola Solutions chief financial officer, said in a statement.

Collectively, Motorola Solutions predicts it will be able to curtail its pension shortfall through an orchestrated process that includes shifting the benefit shortfalls within its more than 80,000-member U.S. pension plan, where only 5,000 participants are active employees. The current liability is around $8.4 billion, says Tama McWhinney, director of corporate communications for the company.

While this is the third-largest pension transfer transaction of its kind, following recent U.K.-based deals including Aviva and the ICI Pension Fund, retirement plan consultants and advisers say the strategy is a very common practice among DB plan sponsors.

Peggy McDonald, senior vice president and actuary of pension risk transfer at Prudential Retirement, explains “there are several factors that have come together to move plan sponsors toward risk transfer,” which include an improved overall funded status, acknowledgement of longevity risk and low interest rates. Steep premium increases by the Pension Benefit Guaranty Corporation may also be a factor, she says.

“There have been many similar transactions among small- and mid-size companies and across industries each year, with the pace of those transactions also increasing significantly,” McDonald says. “They may not get the press attention, but they are happening for substantially the same reasons companies with larger plans feel compelled to act.”

Richard Jones, a senior partner and leader of the national practices group for Aon Hewitt’s retirement consulting practice, agrees that the “size is huge, but the components are not that unique, frankly.” Aon Hewitt served as a strategic adviser on the transfer.

Among plan sponsors of all sizes, “we are definitely seeing additional interest in these types of approaches and transactions to transfer pension risk,” Jones says. “The larger ones don’t come around quite as often because of their size, but we’re seeing interest across the spectrum of plan sponsors.”

Lump sum scheme

Also 32,000 of the 42,000 people who make up Motorola Solutions’ terminated vested employees – those participants that left the company but have not started receiving their benefits – will be able to either take a lump sum payment or opt to start receiving benefits checks.

Jones adds that the current interest rate environment is opportune for lump sum distributions, which can allow companies such as Motorola Solutions to strategically move forward without worrying about pension liabilities.

“They would like to eliminate future volatility through different economic sectors into the future and focus their finances and their operations on their core businesses,” Jones explains.

In April, Zebra Technologies announced it would buy Motorola Solutions’ enterprise business for $3.45 billion. The deal, set to close by the end of 2014, will create a combined company of about 20,000 channel partners in more than 100 countries. Meanwhile, the smaller Motorola Solutions company will maintain its voice and data communication solutions for government and public safety customers worldwide.

Because of the structural change, McWhinney says “it’s the ideal time to move quickly to getting our balance sheet and our capital structure in line.”

“It’s [addressing] our needs as a smaller business,” she explains. In the late 1990s, Motorola had roughly 150,000 employees and six business units, she adds.

Moving forward, Motorola is not giving up on its pension plan, and says it will deposit $1.1 billion into the plan in 2014. The future investment in the pension is to “make sure that it’s on a solid footing,” McWhinney says.

Also see: De-risking trend redefining the global pension market

“The main thing is that our pension liabilities were outsized for a company of our size and what we’re pleased with is that we’re doing this from a position of financial strength,” she says, while noting the changes enable Motorola to reduce its retirement plan liabilities while still preserving benefits.

Source: Employee Benefit News