People Are Living Longer; Just Ask AT&T, IBM

By David J. Lynch

Bloomberg News

People are living longer — and that's bad news for some companies' bottom lines.

As pension plans incorporate new life-expectancy estimates into their calculations, investors are glimpsing the financial fallout from aging societies.

AT&T Inc. last month absorbed a $7.9 billion noncash charge from rising pension costs, including retirees' longer lifespans. At Northrop Grumman, updated mortality estimates boosted its pension obligations by $4.5 billion to $30.5 billion, while shareholders in IBM saw their equity shrink by about $6 billion.

"2014 was a tough year for pension plan sponsors," said Matt Herrmann, a senior consultant for Towers Watson in St. Louis. "Folks are going to continue to live longer. That means a significant increase in pension liabilities."

To avoid ballooning costs from years of additional pension checks, some companies are paying insurers to take over their plans. Life insurers see the longevity deals, which expose them to financial risk if people live too long, as balancing their existing exposure to paying if customers die too soon.

In September, Motorola Solutions cut its pension obligations by $4.2 billion by transferring responsibility for 30,000 retirees to Prudential Financial Inc. and offering others lump-sum payments. Now, if Motorola retirees live longer, Prudential will be on the hook, not their former employer.

Dozens of additional deals are likely this year. In a MetLife Inc. survey of 228 pension plans, 29 percent said they are considering similar transactions over the next two years.

Demand for such pension risk transfer deals eventually will eclipse the insurance industry's capacity and provide an opening for investment banks to sell securities known as "death derivatives," some experts say.

"The capital markets are going to have to come in because there's not enough capacity from insurers and reinsurance companies," said Rosemarie Mirabella, assistant vice president for A.M. Best Co., a global credit-rating agency in Oldwick, New Jersey.