Fitch Ratings believes Verizon Communications's plans to transfer the existing pension obligations of its management retirees to Prudential Insurance through the purchase of a group annuity contract has an incremental positive impact on the company's credit profile. The transfer is a significant step to reduce future cash contributions to the company's pension plans. Fitch's IDR on Verizon is 'A' and the Rating Outlook is Stable.
To enact the plan, the Verizon Management Pension Plan will transfer an undisclosed level of assets to Prudential which will be used to purchase a group annuity contract. Under the contract, Prudential irrevocably assumes the responsibility to pay the pension benefits of approximately 41,000 management retirees that had retired prior to Jan. 1, 2010. Following the purchase of the contract, Verizon will have no further obligations for the pension benefits of this set of retirees. The purchase of the group annuity contract is expected to take place in December 2012, and is subject to modest adjustments. Prudential will be responsible for benefit payments to management retirees beginning in January 2013.
The transfer of the management retiree obligations will reduce the projected benefit obligation (PBO) of Verizon's pension plans by approximately $7.5 billion on a GAAP basis, or 25% of total pension liabilities. At the end of 2011, the PBO associated with all of Verizon's pension plans was $30.6 billion, and, based on underfunding of $6.5 billion, Verizon's plans were approximately 79% funded.
Verizon plans to contribute $3.4 billion to its pension plans in 2012, $2.1 billion higher than the company estimated at the beginning of 2012. Through the first nine months of 2012, Verizon contributed $1.8 billion to its pension plans and expects to contribute $1.6 billion to the plans during the fourth quarter of 2012. The additional contribution will be made prior to the closing of the transaction so that the transaction does not decrease the funding percentage of the remaining plans.
Incorporated into the transfer of obligations is an undisclosed premium. Fitch believes the premium is reasonable, given Verizon will be able to avoid certain administrative costs in the future and premiums paid to the Pension Benefit Guaranty Corporation (PBGC).
In Fitch's opinion, Verizon has sufficient liquidity to fund the higher contributions in 2012, and as a result, the contribution will have an immaterial effect on Fitch's expected 1.3x leverage metric for yearend 2012. Based on Verizon's statements that there will no longer be required contributions in 2013 under its revised pension strategy, Fitch believes there will be no changes to Fitch's 2013 expected debt levels for Verizon, and that the company will be able to operate within Fitch's expected 2013 leverage range of 1.3x-1.4x for its current rating.
