IBM Completes $6 Billion Pension Risk Transfer to Prudential in Group Annuity Buyout

As class-action lawsuits increase over pension risk transfers, IBM has announced that it entered into a $6 billion pension risk transfer agreement with Prudential Insurance Company, completed on September 11. The deal comes after the technology firm, once a leader in the shift from defined-benefit plans to defined-contribution plans in the 1980s, switched to a “hybrid pension” plan in 2023.

Under the terms of the transaction, IBM has purchased a single premium group annuity contract that transfers to Prudential $6 billion of defined-benefit obligations from the company’s Personal Pension Plan. The insurer will assume responsibility for making retirement benefit payments to approximately 32,000 retirees and beneficiaries.

“Under the group annuity contract, Prudential has made an irrevocable commitment, and will be solely responsible, to pay the pension benefits of each transferred participant that are due on and after January 1, 2025,” according to the SEC filing.

This marks the second pension risk transfer agreement between Prudential and IBM, which struck a deal with the insurer in 2022 to cover approximately 100,000 IBM retirees and beneficiaries.

Last November, IBM notified employees that it would suspend its 401(k) match and 1 percent automatic contribution as of January 1, 2024 and will instead make a monthly account credit toward a new “retirement benefit account.” The new plan also provides a one-time salary increase to offset the difference between the current company contribution and the new account credit amount.

As the retirement industry evolves from pension plans to 401(k) plans, pension risk transfers enable firms to offload the burdensome administration of allocating pension plans. Pension risk transfers have helped firms bridge the transition; however, there have been a rash of class-action lawsuits filed by retirees who claim their employers chose a risky insurer. In 2023, there were a record 773 pension risk transfers, and that number is expected to grow. Increasingly, private equity firms are seeking to purchase stakes in annuity assets to gain access to a permanent capital stream.

These lawsuits are representative of a new line of retirement plan litigation that has targeted several major employers over pension risk transfers. In June, AT&T filed a motion to dismiss two lawsuits alleging that the company and State Street Global Advisors selected a risky insurer, Athene Annuity and Life Company, to conduct AT&T’s $8 billion pension risk transfer in May 2023, offloading the pensions of 96,000 of plan participants.

Lockheed Martin and Alcoa, which are also involved in pension risk transfer class-action lawsuits, selected Athene as their provider; however, Athene has not been named in any of these cases. In the first half of 2024, Athene completed 48 pension risk transfer deals, valued at $52.3 billion and affecting over 550,000 plan participants, according to the company’s website.

Rising interest rates are driving companies to offload retirement plan liabilities to annuity providers via pension risk transfer. In the first quarter of 2024, there were twice as many pension risk transfers, totaling $14.6 billion, than in the first quarter of 2023, according to LIMRA.

From: BenefitsPRO