FedEx announces $6 billion risk transfer deal

FedEx will transfer about $6 billion of pension obligations for 41,000 U.S. retired employees to MetLife, in the largest annuity pension de-risking purchase booked since 2012.

FedEx sponsors two defined benefit retirement plans for about 270,000 participants. At the end of fiscal year 2017, the company reported $29.9 billion in plan obligations, and $26.3 billion in plan assets, for a funded ratio of nearly 88 percent, according to the firm’s most recent annual report.

In a Form 8-K filing with the Securities and Exchange Commission, FedEx said the annuity purchase was funded with plan assets. The affected retirees will begin getting checks from MetLife on August 1, 2018.

The annuity purchase is the latest move by FedEx over the last several years to address pension liabilities and volatility in annual funding requirements.

The company contributed $2 billion in 2017 to its plans, and $660 million in 2016 and 2015, most of which was above contributions required by the Pension Benefit Guaranty Corp, according to last year’s annual report.

Upon enactment of the U.S. Tax Cuts and Jobs Act last December, FedEx was one of the first large sponsors of defined benefit plans to announce an additional voluntary contribution of $1.5 billion to its pension plans.

And in 2017, FedEx paid $1.3 billion in lump sum payments to 18,300 terminated vested employees.

In a statement, the company said the risk-transfer deal with MetLife will not change payments to impacted retirees, and will put the company in a secure position to meet future obligations.

“FedEx is committed to maintaining financially secure pension benefits for our retirees and their beneficiaries,” said Alan B. Graf, Jr., executive vice president and CFO, FedEx.

“This transaction better positions FedEx to manage future pension plan costs, and retirees will receive the same pension benefit from a highly rated insurance company,” Graf added.

FedEx’s fiscal year ends at the end of May. Last year it posted $60 billion in revenue, and a record $5 billion in operating profit.

A game-changing transaction?

FedEx is a member of the “$20 billion club,” a list of the largest corporate sponsors of defined benefit plans that book at least $20 billion in plan liabilities, coined and tracked by analysts at Russell Investments.

How the largest sponsors manage pension liabilities tends to be emulated by other sponsors, says Justin Owens, director, client strategy and research at Russell Investments.

“FedEx could be setting a significant precedent for other defined benefit sponsors on the pattern of risk and expense management,” wrote Owens, a pension actuary, on the company’s announcement.

Along with the pension buyout, the lump sum payments, and high voluntary contributions, FedEx has also applied a liability driven investment strategy to half of its pension liabilities, exposing plan assets to less equity market and interest rate volatility.

In 2017, plan assets returned 9.6 percent, higher than the assumed 6.5 percent. The 15-year average return on assets was 7.8 percent, net of management fees. In 2016, plan assets returned 1.2 percent, lower than the 6.5 percent expected return.

“As (FedEx’s) defined benefit plan obligations represent over 50 percent of the company’s market capitalization, a desire for a smaller footprint, lower funded status volatility and reduced expenses are likely paramount priorities,” Owens explained in a blog post.

The 41,000 affected retirees represent about 15 percent of participants in FedEx’s pension plans. The reduced headcount will lower FedEx’s flat rate premium to PBGC, which is set on the number of plan participants, by $3 million a year, Owens estimated.

Owens suggested other sponsors could follow FedEx’s lead in transferring risk to insurance companies.

“Given the recent increase in funded status, the incentives for sponsors to make discretionary contributions (new tax laws taking effect, PBGC premium rate increases, desire for risk transfer, etc.) and an ongoing trend toward interest rate management, FedEx could act as the harbinger for a renewed effort by sponsors to de-risk their pension plans,” he added.

The $6 billion risk-transfer deal is the largest since 2012, when GM and Verizon inked $26 billion and $7.5 billion deals, respectively.

It also introduces MetLife as new competitor in what Owens describes as the “jumbo” risk transfer market. Previously, Prudential negotiated the four largest pension risk transfer deals. MetLife now claims the third largest deal ever done.

Moody’s Investment Services says the transaction will be credit positive for MetLife, despite the assumption of new risks.

“The concentrated nature of the transaction makes it more risky than writing the same amount of premium spread over a number of smaller transactions over an extended period. Additionally, MetLife assumes the risk that retirees will live longer than it anticipated, which would require it to pay out more retirement benefits than it expected,” wrote Manoj Jethani, vice president and senior analyst at Moody’s, in an issuer note.

Nevertheless,  Jethani says MetLife is well positioned to manage the risk.

“Given MetLife’s actuarial, asset liability management and investment expertise, the company has the resources to participate in and bid on such large pension buyout transactions,” he added.

Only a handful of large insurers are able to participate in a pension risk transfers the size of FedEx’s, wrote Jethani, who noted the deal as further evidence of more sponsors wanting to transfer pension risk to insurance companies.