Verizon Communications recently announced the transfer of about $7.5 billion in pension obligations to Prudential Financial. Verizon’s reported purpose in undertaking this move is to lower pension-related risk while improving its financial profile. Similarly, General Motors also selected Prudential to assume the retirement obligations of some 42,000 of their current retirees. GM’s decision to transfer some $26 billion of defined benefit liabilities to Prudential reflects the difficulty large corporations like GM face when managing their increasingly hefty pension liabilities. Larger insurers like Prudential seem to be a natural fit for taking over those obligations, and many experts believe more pension risk transfers may be on the way.
So as advisors, what is the takeaway from these recent events? As corporations look at a significant employee retirement plan buy-outs, where the liability is wholly shifted from the plan sponsor to the insurer, is there an opportunity to help your clients ensure that the liability they assume by accepting a retirement buy-out is one that can be managed to accommodate their future income needs, enable them to not out-live their income and allow for a continuation of their lifestyle and care for their spouse upon their passing?
Whether they use market investments or fixed vehicles such as annuities to manage these assets clients must have a clear understanding of what that means for their future. Warren Buffett, in his most recent shareholder letter, defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power‑after taxes have been paid on nominal gains‑in the future.” As I read this article it occurred to me that this is the exact reason why Verizon, GM and others are looking to carriers for group annuity solutions.
An annuity is a perfect product to help round out a good financial plan. However, an annuity is not an investment. What they do ensure is your client’s ability to have “power to purchase” in their later years, and to pay taxes on this future income in a way that fits their then current economic situation, based on their tax rate and lifestyle. According to IRS tables for a married couple, both age 65, the survivor can be expected to live, on average, another 25 years. Since this is only an average, it’s likely some will live only five years while others live 30 years.
To me, as advisors for our pre-retiree and retired clients we have a similar goal as the Department of Labor outlines in its Interpretive Bulletin 95-1 to plan sponsors: Our fiduciary responsibility is to choose the “safest available annuity” for our clients.
Because there is a lot of uncertainty in life expectancies, the security of a guaranteed income can be helpful in eliminating some of the risk for your clients. For your clients doing retirement income planning, you might suggest that they calculate their needed income, and provide for any supplement to Social Security and company pension payments by purchasing an immediate annuity. It’s a solution whose time has come.
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