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Manufacturer SPX takes 2-step approach to de-risking pension obligations

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Manufacturer SPX takes 2-step approach to de-risking pension obligations

In a move to reduce pension plan risk, SPX Corp. said Thursday that it is buying a group annuity from Massachusetts Mutual Life Insurance Co. to provide benefits to about 16,000 retirees and will offer about 7,500 former employees who are vested but not yet receiving benefits the opportunity to convert their future annuity into a cash lump-sum benefit.

Through the two actions, the Charlotte, N.C.-based manufacturer expects to reduce its U.S. pension plan obligations by about $800 million. At end of the 2012, SPX's U.S. pension plans were underfunded by $409 million, with $1.346 billion in liabilities and $936.8 million in assets, according to its 2012 10-K report.

Plan funding, though, has improved following SPX's $250 million pension plan contribution during the first quarter of 2013.

That $250 million contribution and the current economic environment “have put us in position to take these actions, which are not expected to require any additional funding,” SPX Vice President and Chief Financial Officer Jeremy Smeltser said in a statement.

The twin actions “are both consistent with our strategy to reduce volatility in pension costs and funding requirements and are expected to strengthen our balance sheet and improve our financial flexibility,” Mr. Smeltser said.

SPX's de-risking approach follows those of other big employers. Last year, for example, Verizon Communications Inc. transferred about $7.5 billion in pension plan benefits earned by about 41,000 management retirees through the purchase of a group annuity from Prudential Insurance Co. of America Inc.

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In addition, General Motors Co., much like SPX, took a two-step de-risking approach. GM purchased a group annuity from Prudential to cover benefits of tens of thousands of participants in its pension plan for salaried employees and offered to 44,000 retirees the opportunity to convert their annuity to a lump-sum benefit. About one-third of the retirees accepted the offer.

And more employers are likely to implement de-risking programs, experts say.

“As plan sponsors are achieving improved funded status from contributions and higher equity returns, we are often seeing more interest in de-risking through settlement activities than investment,” said Jason Richards, a senior retirement risk management consultant with Towers Watson & Co. in St. Louis, which was SPX's primary consultant on the de-risking project.