Prudential and International Paper Enter PRT Transaction

The Prudential Insurance Company of America has agreed to provide a group annuity contract and take on approximately $1.3 billion in pension liabilities from International Paper, focusing on vested employees with smaller monthly benefits. 

In a transaction designed to reduce its own risk related to long-term pension obligation, International Paper has transferred $1.3 billion in pension benefit liabilities to the Prudential Insurance Company of America.

According to both parties, the transaction will be funded directly with pension plan assets, and at the end of 2017, Prudential will formally assume responsibility for pension benefits and annuity administration for approximately 45,000 former employees or their beneficiaries receiving less than $450 in monthly benefit payments from the plan. The transaction is expected to close on October 3, 2017, subject to customary closing conditions.

As the firms lay out, there will be “no change to the pension benefits for any plan participants as a result of the transaction.” In addition, retirees and beneficiaries who will be covered by this transaction will be receiving “individualized information packages” with further details and answers to frequently asked questions.

News of the sizable deal comes at a time that the attractiveness of risk transfers still seems to be increasing. In fact, recent research about the topic indicates that lowering the corporate tax rate in 2017 or 2018 would “very likely” motivate pension sponsoring companies to increase pension plan funding—often a precursor to purchasing a group annuity, according to Prudential—while fully 40% agreed that lower taxes would lead them to execute a full or partial pension liability transfer. In another important trend that has taken shape in recent years, the pace of annual pension risk transfer deals seems to have become less seasonal.

“First and foremost we are committed to ensuring our retirees’ benefits are secure and maintained,” observes Glenn Landau, senior vice president and chief financial officer. “This transaction achieves that goal, while at the same time enabling International Paper to better manage future costs associated with our pension plan.”

As a result of the transaction, the company expects to recognize a non-cash pension settlement charge of approximately $400 million before tax ($247 million after tax) in the fourth quarter of 2017.