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Corporate Annuities: Easing the Pension Burden

Easing The Pension BurdenMore and more corporations are turning to annuity issuers like Prudential to manage their pensions.  Verizon Communications last month bought an annuity for a whopping 7.5 Billion from Prudential to offload approximately 25% of its pension obligations.

Even at the bottom of the markets for interest rates, annuities are fundamentally a way to shift risk from one party to an insurer.  That can be you, buying an annuity with your savings, or it can be your employer using ‘your’ money held in the pension fund to accomplish the same goal.

As the WS Journal said in an article today, the deals don’t change how much the retirees are paid, it does shift risk from the employer to another carrier.  401K’s by contrast shift the risk of retirement and longevity from employer to individual by funding a retirement account and in so doing, close their pension obligations out on the front end.

You can read more about these recent corporate annuity purchases here:

http://blogs.wsj.com/cfo/2012/11/06/lightening-the-pension-load/

 

 

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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