Motorola Solutions is transferring a big chunk of its pension obligations to a leading insurer, aiming to reduce the risk on its balance sheet.
Motorola Solutions will buy a $3.1 billion group annuity contract from Newark, N.J.-based Prudential Insurance Co. of America under which the insurer will pay and administer retiree pensions for 30,000 eligible former U.S. employees who started receiving pension payments by last year, according to Motorola. Prudential will invest the $3.1 billion from Motorola Solutions and expects to make an undisclosed profit.
The deal, the third-largest of its kind, is expected to close by the end of the year. Prudential will begin paying the benefits in early 2015.
The deal is subject to regulatory approval.
Motorola Solutions said Wednesday that it also plans to offer lump-sum payments to ex-employees who haven’t yet started getting benefits in exchange for them forgoing traditional pension payments. The amount of the lump sum will depend on the eligible former employee’s length of service, and it will range from “very small numbers” to $1 million, a spokesman said.
Schaumburg-based Motorola Solutions will retain responsibility for paying the pensions of up to 40,000 current and former workers. The communications technology company said a bond sale last month will allow it to infuse $1.1 billion into its U.S. pension plan this year, $800 million more than it projected at the beginning of the year. The bond sale and the Prudential deal should lower its pension obligations by 50 percent, from $8.4 billion today to $4.2 billion, the spokesman said.
The Motorola Solutions plan will remain about 80 percent funded.
“We’re taking very aggressive action here to deal with a large legacy issue, our outsized pension obligation,” Motorola Solutions’ corporate vice president and treasurer Rob O’Keef said in an interview.
Motorola Solutions has significantly downsized over the past two decades — from 150,000 employees in 1997 to 20,000 employees today. About 5,000 more will spin off to Lincolnshire-based Zebra Technologies when the sale of Motorola Solutions’ enterprise unit closes this year.
Revenue has also dropped, from about $40 billion to closer to $8 billion.
“And we’re still carrying the legacy pension obligations of all those businesses we’ve divested,” O’Keef said.
Employees at Motorola Solutions hired before Jan. 1, 2005, are eligible for pensions. Just 5,000 active employees will get pensions, O’Keef said.
Pension debt is volatile, O’Keef said. At the end of last year, for example, Motorola Solutions’ U.S. pension liabilities were $7.3 billion and 84 percent funded — now they’re up to the $8.4 billion, O’Keef said.
“It became so clear that this obligation was creating volatility that the smaller business just couldn’t stomach,” O’Keef said. “Our core business is not managing retirement assets and liabilities. Prudential’s business is. … Our shareholders do not want our earnings and cash flows to be whipsawed by changes in interest rates.”
Insurance companies like Prudential specialize in managing large pools of assets and long-term risk, said Peggy McDonald, senior vice president and actuary for Prudential.
“We have actuarial expertise and investment expertise, and expertise in any transaction that has to do with longevity,” McDonald said. “We have the investment experience, insurance and regulatory benefits to make sure these benefits will be paid.”
Rising costs and increased life spans have made traditional pension plans more expensive for employers to fund, she added.
Also, businesses will see an increase in the next few years on premiums they pay to the Pension Benefit Guaranty Corp., a government agency that insures private-sector pension plans. Persistently low interest rates also make it harder for companies to reap returns on funds they set aside for the liabilities.
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Prudential also took on pension obligations for General Motors ($26 billion) and Verizon ($7.5 billion) in recent years, in the largest and second-largest pension transfer deals ever in the U.S., McDonald said. Prudential manages pension benefits for 1.6 million people at more than 5,700 companies, it said, totaling $330.5 billion in retirement funds.
Motorola Solutions said it realizes its retirees will have questions about the move.
“It’s complicated,” O’Keef said. “Change creates anxiety and we all recognize that. We’ve gone to great lengths to construct something that if we explain it, it will make sense. … There are no changes to their benefits, the amount of their checks will remain the same.”
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