(Reuters) - Verizon Communications Inc will transfer $7.5 billion in pension obligations to insurer Prudential, removing a quarter of its long-term employee retirement burden with a single upfront payment.
The move by the company, which operates No. 1 U.S. wireless carrier Verizon Wireless with Vodafone Group Plc, follows a similar deal that General Motors Co did with Prudential earlier this year.
The transaction affects U.S. management pension benefits covering about 41,000 current management retirees, Verizon said in a statement on Wednesday.
“It’s prudent business for us,” said Verizon spokesman Ray McConville, adding that it allowed the company to focus on its business rather than managing a fund.
“Interest rates will remain low into 2015,” he said. “We don’t have to be interest rate speculators.”
Verizon said it would add $2.5 billion to the pension plan, including contributions made in September, so that the plan’s funding level does not decline. The company declined to comment on how much of a premium it was paying, saying it would disclose more details when it reports earnings Thursday.
Also known as pension terminal funding, the concept of the deal is simple: an employer pays an upfront premium to an insurance company for an annuity that covers the members of a pension plan.
The insurer becomes responsible, via the annuity, for all of the retirees’ pensions and the sponsor gets to wash its hands of the obligation.
Shares in Verizon held steady in after-hours trade on Wednesday at $44.72.
Reporting by Sayantani Ghosh in Bangalore and Jillian Mincer in New York; Writing by Ben Berkowitz; Editing by Rodney Joyce, Tim Dobbyn and Leslie Gevirtz