Prudential Financial’s (NYSE:PRU) $29 billion deal for the acquisition of automaker General Motors‘ (NYSE:GM) pension obligations has opened a new window of opportunities for other retirement solutions providers such as MetLife (NYSE:MET), AIG (NYSE:AIG) and Manulife (NYSE:MFC). (See Prudential Signs Agreement With General Motors For Pension Obligations)
Companies in the U.S. face a shortfall in retirement funds as the Russell 1000 Index of large U.S. companies revealed a $435 billion gap between pension liabilities and assets.  With an expected rise in life expectancy and retirement age, this gap is set to further increase in the current market environment, encouraging companies to follow the example set by GM. (See Good Times Ahead For Retirement Solutions Providers)
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Caution To The Wind
As U.S. Treasury yields approach a record low amid growing concerns about the European sovereign debt crisis,  employers will be tempted to offload pension obligations, but will be wary of the upfront costs involved.
GM, according to the terms of its deal with Prudential, will contribute $3.5 to $4.5 billion in cash to help fund the pension plan. Companies looking to follow the GM model will have to fund the plan as well as contribute an additional 15% of their assets as premium to the insurance company chosen to cover the pension. Insurance companies too will have to be prudent in pricing as the size of such deals is huge, and they will only get one bite of the apple. Ford Motors (NYSE:F) has already rejected the idea of offloading its obligations to a third party.
The lucrative offer of derisking pension plans, particularly in the current market conditions, will have many takers, in our view. Timken Co. (NYSE :TKR), an Ohio-based anti-friction bearings manufacturer, has $3.1 billion in liabilities and $2.6 billion in assets and is currently in talks with Prudential about annuitizing its pensions. We believe that the GM deal will act as an ice-breaker and will encourage other companies in the U.S. to opt for third parties to handle their pensions.
We have a price estimate of $55.24 on Prudential’s stock, about 20% above the current market price. You can gauge the impact of a change in annuity sales by modifying the above forecast.Notes:
- GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19th June, 2012 [↩]
- Treasury 10-Year Yields Fall Most in Week on Euro Concern, Bloomberg, June 26th, 2012 [↩]