From my perspective, underfunded pension plans will be one of the biggest contributors to the next financial crisis. While this article deals with private pension plans initiated by companies, probably a bigger concern are public pension plans. In many cases these are woefully under funded and the initiator (company, government, or educational institutions) hopes that good financial times will enable them to catch up on contributions. However, when reality sets in with a large and growing number of retirees drawing from their plans, something will have to give. In most cases, what gives is that pensioners are notified that, due to the fact of underfunding over the years, the amount available to retirees will be cut to 80% or less of the amount those former employees expected.

Now we have insurance companies stepping in to offer to buy out those plans and offer up annuities to retirees. The question is, what will they back these offerings up with and how will they offset their risk? It seems to me, we will end up with some bundling akin to the risky credit default swaps that were used with mortgage backed securities that precipitated the last global financial meltdown.

I think alarm bells should be ringing LOUDLY.


U.S. insurers sense opportunity in unwanted pension plans


By Suzanne Barlyn

NEW YORK (Reuters) - U.S. insurers are buying corporate pension plans at a record clip as rising interest rates and all-time high stock-market values give companies the perfect excuse to offload them.

Calculating they can make more money from selling companies an annuity to cover the cost of the pension plans and then invest the proceeds in bonds and other securities, insurers are competing to persuade corporate America to sell them their pension risk.

These deals, known as pension risk transfers, have been around for at least 90 years, but they can be limited by a Catch 22: in good times, corporate leaders feel less of a need to rid their companies of pension burdens, and in bad times it is more expensive to do so.

"There's a huge opportunity for the insurance industry," said Ellen Kleinstuber, who advises pension-plan sponsors as an actuary for CBIZ Inc.

Last week, Prudential Financial Inc, the biggest player in pension transfers, said it had finalized $2.2 billion in pension deals during the fourth quarter, including a $1.8 billion deal with United Technologies Corp.

Other large insurers, including MetLife Inc and Principal Financial Group Inc are also competing for hefty pension deals as smaller insurers jockey for a slice of the market.

With so much competition, many pension consultants expect 2017 to be a strong year for pension deals. Pension transfers totaling $8.1 billion were finalized in the first nine months of 2016, according to LIMRA, an industry trade group. The number of deals hit 225, the highest in more than 25 years.

"It's really unstoppable now," said Scott McDermott, a managing director at Goldman Sachs Asset Management who advises companies on pension issues.

UNDERFUNDED

Pension transfers have been kicking around the insurance industry since the Cleveland Public Library unloaded its pension to Prudential in 1928.

Prudential is still making payments to two of those employees, ages 100 and 103, a spokesman said.

The biggest driver of the trend in recent years is the growing number of companies that are deciding to end their plans, McDermott said.

As retirees live longer and the legal and financial cost of maintaining pensions rise, corporations are keen to jettison them.

The problem for companies looking to offload is that the pension plans must be fully-funded before they can sell them. GM, for example, had to inject more than $2.8 billion into its pension before closing a 2012 transfer to Prudential. It also paid Prudential a $2.1 billion fee for taking on the assets.

GM's current U.S. pension plan that is still held by the company is underfunded by $7.2 billion.

Surging stock markets and rising interest rates are making it easier for companies to replenish their pension plans but there are still gaps. The average corporate pension fund was 82 percent underfunded as of Jan. 31, according to Mercer Investment Consulting.