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The answer is this; three large American companies have turned to annuities to offset uncertainty in their pension obligations.
PPG Industries, Kimberley Clark, and Verizon are only three 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 could corral much of their future pension expenses into one payment. Once they wrote the check, they could legitimately know their future obligation, and their responsibility was over. From then on, it was someone else’s problem.
In PPG, their pension fund had liabilities of $5.35 billion and only assets in the pension fund of $4.63 billion. Since people live longer, it was impossible to estimate the liability accurately. The difference between what is owed to those retiring (and retired) and what was available would have been PPG’s problem. 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 result of this action?
Obviously, PPG stock will rise, and retirees are no longer concerned about pension payments. One significant “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. So let those who know how to provide retirement benefits (annuity companies) shoulder the burden, and the stockholders will love it; it looks like a win/win deal.
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