Global pharmaceutical company Bristol Myers Squibb (BMS) historically offered defined-benefit pension plans to employees. Like many companies, BMS began freezing those plans more than a decade ago and transitioning to defined-contribution plans. The Puerto Rico Retirement Income Plan, which served BMS's current and former employees in Puerto Rico, froze participation to employees hired after 2009. Several years later, however, the plan remained on the company's balance sheet.
"We froze the plan, but we continued to have the defined-benefit liabilities on the books," explains Ashish Saraogi, senior director of corporate treasury and benefit investments. "New employees were not participating, but we were still managing the old pension benefits in Puerto Rico."
Saraogi and his colleagues had been considering de-risking the Puerto Rico plan for several years when the strong economic climate of 2022 and 2023 made the prospect more attractive. "Equity markets significantly rallied, and interest rates started rising," he says. "That considerably improved the funding status of the plan. In fact, it actually became overfunded—the asset value was higher than the liability value on our books, based on the discount rate at the time."
BMS treasury first responded to this situation by selling some of the plan's growth investments and transitioning assets to more stable, fixed-income securities that would safeguard the plan's newly improved funding status. "Then we saw the opportunity to take advantage of the overfunded status to perform a pension risk transfer with an insurance company, buying a group annuity contract that ultimately would, in effect, service the plan's liabilities with little or no increased cost," Saraogi says.
He and his colleagues began a thorough analysis of their options. They evaluated the Puerto Rico Retirement Income Plan's investments, on the one hand, and the net present value (NPV) of the pension's liabilities, on the other hand.
"On the asset side, we looked at the current funded status and expected investment returns," Saraogi says. "Then, on the liability side, we looked at the different aspects of what it would cost us to maintain the plan into the future. We performed an NPV analysis on the resources required for administration of the plan, PBGC [Pension Benefit Guaranty Corporation] premiums, and plan liabilities—including projections of participants' lifespan, which determined how long we should expect those liabilities to remain on our books."
Another critical analysis focused on predicting how many participants would opt for a lump-sum payout versus an annuity from a third-party insurer. Plan participants already had the option of receiving a lump sum after terminating employment. In general, direct payment of a lump sum from a pension plan costs the plan sponsor less than purchasing an annuity to satisfy the benefit. Because Saraogi's team expected many participants to prefer the lump sum option, the company decided that the plan termination would also allow current employees to take an immediate lump sum payment.
After gathering the necessary data, the team compared the costs of continuing with the status quo against the costs of de-risking the plan. "We calculated a range of annuity prices at which the transaction would be NPV-positive," Saraogi says. "Then we sought estimates on the annuities from various well-capitalized insurance companies. Based on the estimates provided, we determined that executing a transaction at the prices available could be economical.
"BMS is always looking for areas to streamline our balance sheet, and pensions are a significant liability," Saraogi continues. "Once treasury identified the opportunity for a de-risking transaction, we presented our analysis to the HR benefits team. The HR benefits team understood the value and agreed to assist with driving the initiative forward."
When the teams were aligned on proceeding with de-risking, treasury took the proposed plan to BMS's board of directors and its compensation management and development committee (CMDC). "We presented our proposal and received approval to start the process of de-risking," Saraogi reports. But this initial approval was just the first hurdle to overcome for the company's de-risking transaction to be a success.
The pension committee, as plan fiduciary, put together a core team of internal functional leaders to drive the de-risking process, supported by project management staff and experts in pension risk transfer transactions. The pension committee also retained State Street to act as an independent fiduciary in selecting the insurance company that would provide the group annuity contract and negotiating the terms of that contract.
Treasury was responsible for handling the financial side of the transaction, while the HR benefits team, working on behalf of the pension committee, was responsible for effectively communicating with the plan's participants in Puerto Rico. The independent fiduciary issued a formal request for proposals (RFP) to insurance companies. Other members of the team continued activities such as preparing files with relevant participant data to deliver to the selected insurer.
Upon evaluating responses to the RFP, the project team put together a package for CMDC approval. After the CMDC granted approval, treasury signed a commitment agreement for an annuity from Prudential. Prudential's pricing focused on participants who had already elected to take payment in the form of an annuity, but the team did not yet know how many remaining participants were going to choose the annuity over a lump sum, Saraogi explains. "We agreed with Prudential on the mechanism for pricing the annuities we would be purchasing, depending on what proportion of plan participants chose the annuity option."
In 2023, BMS announced the pension risk transfer transaction, and a year or so later, the deal was complete. The company transferred the majority of its $160 million in pension obligations to Prudential and distributed lump-sum payments to plan participants who chose that option over the annuity. The size of liabilities made this the largest pension de-risking transaction ever completed in Puerto Rico.
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