Prudential and MassMutual in $2.5 billion pension risk transfer deal with Kimberly-Clark

Prudential Financial Inc. and MassMutual have inked a deal with Kimberly-Clark in which the hygiene products company will transfer to the insurers its $2.5 billion in pension liabilities.
As part of the deal, Prudential will administer group annuity payments and interact with retirees, but each carrier will provide half of the total monthly benefits received by the approximately 21,000 Kimberly-Clark retirees. The annuity checks will come from Prudential, and MassMutual will reimburse the carrier monthly for its part of the payments, said Susan Cannilla, vice president in Prudential’s Pension and Structured Solutions business.
This pension risk transfer transaction isn’t the first rodeo for Prudential or MassMutual. Deals under MassMutual’s belt include a $625 million arrangement with SPX Corp. that was struck in 2013. Prudential, meanwhile, cut a $7.5 billion deal with Verizon Communications in 2012, a $29 billion deal that same year with General Motors Co., and a $3.1 billion agreement in 2014 with Motorola Solutions Inc.
What is noteworthy is the fact that Kimberly-Clark and State Street Global Advisors, the independent fiduciary appointed to look out for the retirees, chose to use two insurers.
A call to Kimberly-Clark was not immediately returned, but the company had said in a statement that “based upon a number of factors, including the financial strength of insurers, SSGA determined that a transaction split between Prudential and MassMutual was the safest available annuity structure to provide retiree benefits.”
“It makes sense for them to share the risk and we would anticipate that there could be additional deals where counterparties split the business,” Steve Irwin, a vice president at ratings agency A.M. Best, said. “We would anticipate that there could be additional deals where the counterparties split the business.”
A two-insurer arrangement is also good for the overall pension risk transfer market by spreading longevity risk across more insurance companies. Ratings agency Moody’s Corp. said in late 2014 that Prudential’s large deals exposed it to the risk that it will have to pay out more than expected if participants outlive their actuarial estimates.
“To the extent you have risk-sharing among the participants and to the extent [going with a two-insurer approach] allows you to do more deals, there’s true risk sharing and transfer among the players,” Rosemarie Mirabella, assistant vice president at A.M. Best, said. “This is a very modest-sized transaction from Prudential’s perspective.”
“This isn’t the first time we’ve been asked to quote on scenarios that include splitting [the liability],” Ms. Cannilla said. Over the last three years, Prudential served as lead administrator under four or five deals in which it worked with another insurer, she said.
“I would expect we’ll see [pension plan] sponsors exploring their options in the future, and some may choose to take the same path as Kimberly-Clark,” Ms. Cannilla added.
Defined benefit pensions have strained retirement plans of all sizes, and even employers smaller than Kimberly-Clark are looking for pension risk transfer solutions, noted Gerald Wernette, principal at Rehmann Retirement Builders.
“I don’t think [pension risk transfers] are a bad thing, as long as the retirees’ best interests are being looked out for and they’re getting what’s being guaranteed to them as far as benefits are concerned,” he said. “I’d rather get my check from Prudential than from the Pension Benefit Guaranty Corp., because if the plan is at the point where it’s under the PBGC, then I’m [as the retiree] coming out on the short end of the stick. I may not get my entire promised benefit.”