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IBM offloads $16 billion in pension liabilities

 

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Can you please explain what this means to those of us receiving a pension under the defined benefit plan? Thanks

Sent from Maude's iPhone

On Sep 14, 2022, at 4:10 PM, Roy Barnes via groups.io <choicer27yrs@...> wrote:

??

 

Roy may know more about this than I do.

IMO, it mean's that IBM is reducing its risk and increasing ours (retirees). Our risk is increased because we'll lose the Federal protection for our pension payments.

That said, at least so far, our risk increase looks to me like it will be fairly small. Because IBM is selling the obligation to pay our pensions to two top-notch insurance companies (Prudential and Met Life).

I suspect we'll be getting a letter from IBM, before the end of this year, with more details.
 

I'd always hope this would never happen so as to keep ERISA protections. Just like IBM to have the last laugh. Sucks.
 

What this means is that retirees will receive their monthly checks from two insurance annuities with Prudential and MetLife.? It will show up as a single check from Prudential, but will be actually paid by both companies.? Things will look very similar to the way they do now - the amounts will be the same, But instead of the money coming from the IBM Pension fund, it will come from insurance annuity funds set up with the insurance companies.? IBM will no longer have any responsibility for the payments - now the responsibility will be with the insurance companies to properly invest and manage the annuity funds.? With the pension fund, if it became underfunded, IBM would have to add more money to it.? Now, IBM will be off the hook and it will be up to Prudential and MetLife to figure out how to cover any shortfall.

Another difference will be that the federal ) will no longer back up the pension payments should the fund get into trouble.? Today, the PBGC would cover pension payments up to about $74,000 a year for a retiree at age 65.? With the insurance annuities,the PBGC coverage is gone.? Instead, would provide coverage should the insurance company go bankrupt.? The amount of coverage depends on the state you live in, and also is based on the present value of the annuity at the time of bankruptcy, rather than the monthly (or annual) amount you receive.? This could mean that a retiree would get less than their full pension in the case of a bankruptcy.?? But before things ever get to that point, states work to transfer the responsibility for paying the annuities to other, healthy companies.? Often, they are successful in doing this and no one loses anything.

Another difference is that pension plans are not run to make a profit.? They must follow strict federal guidelines to ensure that they are able to pay all the pension liabilities.? Insurance companies are run to make a profit.? Although they are supposed to have a fiduciary responsibility to the annuity recipients, they balance that against their desire to make a profit.? Where IBM has invested the pension funds very conservatively (mostly in bonds), I expect that Prudential and MetLife will change this somewhat to get better returns by investing more in stocks and other higher risk investments.
 

Thank you for that informative response.?

Bob Young


On Thu, Sep 15, 2022 at 2:16 PM linton4 via <linton4=[email protected]> wrote:
What this means is that retirees will receive their monthly checks from two insurance annuities with Prudential and MetLife.? It will show up as a single check from Prudential, but will be actually paid by both companies.? Things will look very similar to the way they do now - the amounts will be the same, But instead of the money coming from the IBM Pension fund, it will come from insurance annuity funds set up with the insurance companies.? IBM will no longer have any responsibility for the payments - now the responsibility will be with the insurance companies to properly invest and manage the annuity funds.? With the pension fund, if it became underfunded, IBM would have to add more money to it.? Now, IBM will be off the hook and it will be up to Prudential and MetLife to figure out how to cover any shortfall.

Another difference will be that the federal ) will no longer back up the pension payments should the fund get into trouble.? Today, the PBGC would cover pension payments up to about $74,000 a year for a retiree at age 65.? With the insurance annuities,the PBGC coverage is gone.? Instead, would provide coverage should the insurance company go bankrupt.? The amount of coverage depends on the state you live in, and also is based on the present value of the annuity at the time of bankruptcy, rather than the monthly (or annual) amount you receive.? This could mean that a retiree would get less than their full pension in the case of a bankruptcy.?? But before things ever get to that point, states work to transfer the responsibility for paying the annuities to other, healthy companies.? Often, they are successful in doing this and no one loses anything.

Another difference is that pension plans are not run to make a profit.? They must follow strict federal guidelines to ensure that they are able to pay all the pension liabilities.? Insurance companies are run to make a profit.? Although they are supposed to have a fiduciary responsibility to the annuity recipients, they balance that against their desire to make a profit.? Where IBM has invested the pension funds very conservatively (mostly in bonds), I expect that Prudential and MetLife will change this somewhat to get better returns by investing more in stocks and other higher risk investments.

 

But they only offloaded a portion of the liability, less than half.? So what does that mean to ERISA coverage???
 

Is that for future retirees?




On Thursday, September 15, 2022 at 06:11:07 PM EDT, Richard Berry <shadowberr@...> wrote:


But they only offloaded a portion of the liability, less than half.? So what does that mean to ERISA coverage???

 

But they only offloaded a portion of the liability, less than half.? So what does that mean to ERISA coverage???
IBM says that this affects 100,000 retirees. who retired before 2016.? As of the end of 2021:

The total number of participants and beneficiaries covered by the Plan on the Valuation Date
was 257,221. Of this number, 21,398 were current employees, 174,887 were retired and
receiving benefits, and 60,936 were retired or no longer working for the employer and have a
right to future benefits.

So those 100,000 might be the fraction of the 174,887 that retired before 2016.?? I can't quite figure out how that could require only $16 billion in funding.? My simple calculation says that 100,000 retirees would make up $21 billion of the plan's $46 billion in liabilities

All I can think of is that many of those 100,000 are older retirees, some of whom retired in the 80s and 90s when salaries and the corresponding pensions were smaller. ? The remaining 157,000 are younger employees and retirees who benefited from larger salaries, and therefore their share of the pension fund is larger.

In terms of ERISA protections, those retirees whose pensions are converted to an annuity will no longer be protected by ERISA.

 

On Thu, Sep 15, 2022 at 06:29 PM, JoeRoth wrote:
Is that for future retirees?
No, this apparently is for those who retired before 2016.
 

Thanks for that explanation, very helpful.
Mark Buchanan
Down2Earth Images
 

"Insurance companies are run to make a profit.? Although they are supposed to have a fiduciary responsibility to the annuity recipients, they balance that against their desire to make a profit.? Where IBM has invested the pension funds very conservatively (mostly in bonds), I expect that Prudential and MetLife will change this somewhat to get better returns by investing more in stocks and other higher risk investments."

Pension beneficiaries MUST pay close attention to government initiatives broadening investment regulations beyond fiduciary duties to beneficiaries, encompassing broader "stakeholders" and goals such as ESG (Environmental, Social and Governance).?? In our case, Insurance companies' obligations to invest for "returns" on social and environmental goals could mean that beneficiaries' pension payouts ($) become increasingly replaced by vague "returns" on social and environmental goals (not $). ? But this new government "stakeholder" push also affects how most other financial managers (mutual funds, ETFs, etc.) must "invest."?? Please contact your Congressional representatives to protect against this significant threat to protecting your savings, and remember this when you vote.
 

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Does are medical change with this new arrangement?
rchelak2003@...?
 

Although not affected, I received this letter today (see attachment).
?
Bob Young


On Thu, Sep 15, 2022 at 2:16 PM linton4 via <linton4=[email protected]> wrote:
What this means is that retirees will receive their monthly checks from two insurance annuities with Prudential and MetLife.? It will show up as a single check from Prudential, but will be actually paid by both companies.? Things will look very similar to the way they do now - the amounts will be the same, But instead of the money coming from the IBM Pension fund, it will come from insurance annuity funds set up with the insurance companies.? IBM will no longer have any responsibility for the payments - now the responsibility will be with the insurance companies to properly invest and manage the annuity funds.? With the pension fund, if it became underfunded, IBM would have to add more money to it.? Now, IBM will be off the hook and it will be up to Prudential and MetLife to figure out how to cover any shortfall.

Another difference will be that the federal ) will no longer back up the pension payments should the fund get into trouble.? Today, the PBGC would cover pension payments up to about $74,000 a year for a retiree at age 65.? With the insurance annuities,the PBGC coverage is gone.? Instead, would provide coverage should the insurance company go bankrupt.? The amount of coverage depends on the state you live in, and also is based on the present value of the annuity at the time of bankruptcy, rather than the monthly (or annual) amount you receive.? This could mean that a retiree would get less than their full pension in the case of a bankruptcy.?? But before things ever get to that point, states work to transfer the responsibility for paying the annuities to other, healthy companies.? Often, they are successful in doing this and no one loses anything.

Another difference is that pension plans are not run to make a profit.? They must follow strict federal guidelines to ensure that they are able to pay all the pension liabilities.? Insurance companies are run to make a profit.? Although they are supposed to have a fiduciary responsibility to the annuity recipients, they balance that against their desire to make a profit.? Where IBM has invested the pension funds very conservatively (mostly in bonds), I expect that Prudential and MetLife will change this somewhat to get better returns by investing more in stocks and other higher risk investments.

Scan_20220919.pdf
Scan_20220919.pdf

 

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Same here as Bob, same letter, not affected YET.
Wonder when I will be and how they drew the line.
 

IBM posted a that explains the criteria.

1. Who is affected by the purchase of the group annuity contracts?
The annuity purchases generally affect pensioners and surviving beneficiaries, where the pensioner commenced monthly pension payments before January 1, 2016, and the monthly gross benefit amount that is expected to be paid on January 1, 2023, to the pensioner or surviving beneficiary is greater than $2,700 or less than $1,700. The selection criteria were designed to cover a broad group of Plan participants. For beneficiaries receiving pre-retirement death benefits, see the next question.
 

This does leave a lot of dangling questions and/or issues to be dealt with (more like live with, I guess). The guarantees for annuities are defined by the states (?? and are typically $250K max payment (per company) as some kind of discounted present value calculation. That is not going to cover many pensions for those with remaining lifetimes of 20 to however many years. That is kind of disturbing. I suppose one could buy a permanent ladder of Metlife and Prudential Put Options as a hedge here (I am only half joking).?

And I cannot tell if they would continue annual payments until you have hit your max or if this is a lump sum (kind of a tax catastrophe for most of us I would think). Also from what I can glean there is no reserve fund like the PBGC (which charges annual premiums). This appears to be a pay as you go thing where when a given company cannot pay its annuity liabilities, that cost (up to the max) is shared by the remaining members. If there is some kind of major financial disaster on the scale required to put a Prudential under, they would probably be the last to go and those annuitants would probably not see anything (no one left standing to pay). Strictly from the perspective of some unprecedented global financial disaster, you are probably better off with the weakest company (not the same as better off overall, of course). The weakest would go first while there are others still standing left to pay. I know - I tend to be morbid sometimes.?

I am assuming that there are some level of regulations regarding required reserves to cover annuity liabilities but given that this seems to happen at the state level (where surely Prudential/Metlife is not dealing with 50 separate reserve funds) I am not sure how this happens or what those standards might be. From what I have seen out in the industry (particularly WRT union pensions) the standards seem to be poorly enforced. I just have no clue how this works in the annuity world (same as life insurance reserves, I assume).?

Regarding IBM assumptions and investments WRT DB pensions, back in the very early 2000's I stumbled across the assumption that IBM was making at the time when it calculated the ability of the Fund to pay pensions. It was something like 9% per year. This would not pass 2 minutes of scrutiny if they were doing a predominantly bonds kind of investing. I don't see why an insurance company would have a different equation for investing those funds vs. IBM as it was basically profit in both cases (one shows directly on the bottom line while the other is a cost avoidance). And I have to believe that there are some level of legal requirements here.?

dave
 

I think the first signal of possible trouble of these insurance companies? would be a downgrade of their A.M. Best ratings.? From what I can find in Google searches is that both companies are rated A+ which is a superior rating.? ?If either company was downgraded,? that news would be everywhere.? ?I'm not going to worry until I hear about a downgrade.? ? ?

Randy
 

Will these changes give IBM access to any surplus funds in the existing pension or will all funds be transferred to the new annuity.
? I personally have an annuity which includes a rider that provides a "Guaranteed Withdrawal Balance" this is intended to provide protection against a market crash. Does IBM's annuity selection include such protection???

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