The Lincoln Electric Company, a subsidiary of Lincoln Electric Holdings, Inc., has become the latest in a long line of companies to derisk its pension plan by means of a group annuity.
So prevalent has the trend of derisking become that not only will nearly half of defined benefit plan sponsors consider some form of lump-sum payouts in the next two years, according to the Mercer-CFO Research 2015 Risk Survey, but the trend has caught the eye of the International Monetary Fund, which is concerned over the viability of the insurance companies that are assuming sponsors’ obligations.
In addition, at least in Connecticut, there’s been a legislative move to protect derisked benefits from creditors—protection that can get lost when a company offloads its obligations onto a third party.
Lincoln announced that it has entered into an agreement to purchase a group annuity contract from the Principal Financial Group to settle $425 million of Lincoln Electric’s approximate $900 million in outstanding U.S. pension obligations.
Once finalized, the company said, the annuity purchase is expected to reduce Lincoln Electric’s U.S. pension obligation by approximately $425 million, or 47 percent.
The purchase will be funded by existing plan assets and requires no cash contribution. The company expects to incur a noncash pension settlement charge of approximately $132 million in the third quarter.
Under the agreement, the Principal will assume the obligation to pay future pension benefits starting November 1, 2015, for specified U.S. retirees and surviving beneficiaries who retired on or before June 1, 2015 and are currently receiving payments from Lincoln Electric’s U.S. Retirement Annuity Program.
Lincoln said it has contributed $375 million to its pension plans over the last 10 years, and its U.S. pension plans are fully funded.
The group annuity purchase, said the company, allows it to “secure pension benefits for its approximate 1,900 retirees, reduce volatility in pension costs and funding requirements, while maintaining a fully-funded plan for the remaining retiree obligations.”
The annuity purchase will have no impact on the monthly pension benefits Lincoln Electric retirees and surviving beneficiaries receive today.
The group annuity contract includes an irrevocable commitment by the Principal to make annuity payments to affected retirees covered under the contract.
Lincoln Electric is notifying by mail those individuals who are affected by the forthcoming change, and will provide a customer service number to address any questions that affected retirees may have.
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