What does Lockheed Martin’s transfer of pension obligations mean?

France's second KC-130J Super Hercules aerial refueler takes off from Lockheed Martin's facility in Marietta, Georgia, upon delivery in 2019.France's second KC-130J Super Hercules aerial refueler takes off from Lockheed Martin's facility in Marietta, Georgia, upon delivery in 2019 (photo provided courtesy of Lockheed Martin)

Lockheed Martin announced in a press release on August 3 that they were transferring $4.9 billion in pension obligations and plan assets for approximately 18,000 U.S. retirees and beneficiaries to Athene Holdings.

This was accomplished through the purchase of group annuity contracts.

As a followup to the original article announcing the transaction, the Courier sought help from the faculty of Kennesaw State University’s Coles College of Business to explain this transaction in more detail.

Associate Professor Dr. John Abernathy, CPA, PhD, responded to our request and explained how group annuities work and why Lockheed Martin would buy them.

“The way all pension plans operate is that they contractually establish a set amount that they are obligated to pay to employees after retirement,” he wrote to the Courier in an email. “The company sets aside a pool of money each year and invests this money in stocks, bonds, real estate, etc. to meet that obligation.”

“The company then bears the risk of market fluctuations, life expectancy changes, etc.,” Abernathy said.

“In this case, Lockheed is taking all of its pension assets that it has set aside over the years and buying annuity contracts from Athene,” he said. “In return for this investment, Lockheed employees will receive a guaranteed return from Athene.”

How does a pension plan sustain itself?

Abernathy wrote, “Using simple numbers, if Lockheed had $1 million of pension assets and its obligation to retirees was $100,000, then it would need to earn 10% per year on its investments to meet that obligation (10% of 1 million = $100,000).”

“Sometimes it would earn more, sometimes less (this was a big issue in 2008, when markets crashed and pension plans lost large sums of money),” he said. “Clearly there is risk involved and Lockheed bears that risk and is responsible for making investments that meet its obligation.”

How do Lockheed Martin and Athene benefit from this transaction?

“In this transaction, Lockheed is shifting the risk to Athene. No matter what the market does, Athene is obligated to make the $100,000 payment each year,” Dr. Abernathy wrote. “Athene benefits because if they invest the money and earn $120,000, they pay out the $100,000 and keep $20,000. But again, Athene bears the risk of that, because if they invest and earn $80,000, they are still obligated to make the $100,000 payment and they’ll take a loss of $20,000.”

How will it affect retirees and beneficiaries of Lockheed Martin?

“From an individual beneficiary standpoint, there will be no change other than where their pension check comes from — Athene rather than Lockheed,” Dr. Abernathy said. “The amounts and timing should not change.”

How does it affect Lockheed Martin’s finances?

“From a financial reporting standpoint, Lockheed will record a large expense in 2021, but this isn’t necessarily cash that the company has to pay out, but rather a ‘trueing up’ of the market value of the assets that the pension plan held,” Dr. Abernathy wrote. “Furthermore, this is a charge that is one time and will not recur in the future.”

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4 Comments on "What does Lockheed Martin’s transfer of pension obligations mean?"

  1. I would like to comment on your statement that no changes will affect the pensioners, which is not exactly true. Lockheed Martin is pulling a bait and switch on its retirees! And as with all bait and switch schemes, this can have dire consequences for its many retirees (that is why many bait and switches can be illegal or as a minimum unethical).
    Almost all retirees that were in the LMT pension believed that their hard earned efforts would be invested well by a financially strong company. We also made long term financial planning decisions based on this promise. For example, I worked at LMT for 41 years and during that time I continually made IRA, 401k, and many other financial planning decisions based on the LMT promise that my pension contributions along with the contributions from the company would be there throughout my full retirement years. Since LMT is a highly regarded company by the credit rating services there was a solid basis for making my plans (just like every other LMT employee). Since LMT is a very ethical company and ensured all employees go through ethics training every year, the pension seemed like a solid theme to base retirement plans on. So much for the bait and now the issues with the switch follow.
    LMT is pretty highly rated by Moody’s credit rating service (A3 senior unsecured debt rating). Whereas, Athena is rated by Fitch (Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) of Athene Holding Ltd. at ‘BBB+’. The Rating Outlook for Athene and subsidiaries has been revised to Stable from Negative). While there is always a risk that any company can go bankrupt or out of business, the solid Moody’s rating and durability of government defense contracts give LMT a high probability of being able to fund the pension throughout my remaining life. LMT has been in business for many years and has built a durable business with a strong moat. Athene Annuity & Life Assurance Company of New York is in the insurance business and has no moat rating(according to Morningstar). What this means to the pensioner is that there is now a higher probability of default on our pension, which we never planned for because of what seemed like a solid ethical promise of LMT.
    When the pension remained at LMT it was guaranteed by the federal insurance commsion, which bears the full faith of the federal government. Once the pension transfers over to Athena, the pension is only garenteed by state insurance commissions, which were not able to plan for this pension obligation, which has been in the makig for many years of the pensioneers working life. The state insurance commsion has no funding to back up the LMT pension and if Athena does default, LMT pensioneers will most likely lose one of the 3 legs of their retirement plan ( social security, LMT pension, personal savings). In a typical annuity buyout, plan participants lose the protections of the Employee Retirement Income Security Act (ERISA) and the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures pension benefits.
    If an annuity provider becomes insolvent and is unable to meet its obligations, beneficiaries’ primary protection for recovering unpaid benefits would be the patchwork system of State Guaranty Associations

    Athenes business and financial engineering methods along with the money that its parent privat equity owner Apollo is subject to much criticism and is no where in the same ethical league as LMT. The critisim of Athene business model along with its risky investments and being owned by a private equity business is well documented and too long for this pension risk summary. Please see the following for the well documented critisim of Athene business model:
    https://www.ft.com/content/a7cb24ec-cae9-11e8-9fe5-24ad351828ab
    https://www.apolloathenewatch.org/lockheedmartin/?fbclid=IwAR30UNbHtTeOTXiayW0SRg37TiNCOWvGWk4SUUJp-nKVxDdklWK2brDDogE
    https://www.nbcnews.com/business/personal-finance/insurance-companies-take-over-pension-plans-are-your-payments-risk-n1229226

  2. Thomas G Lowrie | September 23, 2021 at 5:14 pm | Reply

    I personally saw a very similar situation happen to retirees from a company I was working for at the time. Not pretty.
    Being a 31 year veteran of MMC/Lockheed what alternatives might we have?

  3. They already offloaded pensions to Prudential in 2019. Why did they not send it to the same company? How do you know as a retiree who holds your pension? Prudential, Lockheed or the Athene, which are shysters from everything I have read.

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