Buy Prudential Financial Case Study

Buy Prudential Financial Case Study

Description
This case examines the challenges of managing pension plans and safeguarding its beneficiaries against risks in its fixed-income portfolio arising from interest-rate movements. At the same time, it introduces us to rapidly vanishing world of defined-benefit (DB) pension plans (as opposed to defined-contribution ones) and the management of the plan’s assets with respect to its liabilities. In 2015, ABC Corporation, an anonymous large publicly traded manufacturing company, executed a pension risk transfer (PRT) deal with Prudential Financial, one of the world’s largest financial ser- vices companies. In this transaction, Prudential took on ABC’s $1.3 billion DB pension obligations in exchange for a premium payment.

Through the DB plan, ABC was exposed to several risks and, especially, investment, interest-rate, and longevity risk, which can lead to asset-liability mismatches and an underfunded pension plan. To avoid these risks, they executed a PRT deal with Prudential meant to insulate the company from any adverse effects as the sponsor of the benefit plan. As such, Prudential’s management need to decide how to construct a portfolio which would cover its obligatory pension payments and earn an adequate shareholder return on capital. To help Prudential reach its goals, you should discuss the following questions and issues in your group before preparing your executive memo or presentation to Prudential’s senior management.

answer the following questions:

ABC Corp has managed its corporate DB plan for many years but now the company decided to engage in a PRT transaction with Prudential. Why?

(a) What are the advantages and disadvantages for ABC to managing the plan themselves?

(b) Why is ABC engaging in this PRT transaction? What advantage, if anty, does Prudential have in managing DB pension plans?

(c) Discuss the two options for how ABC Corp could transfer the value of the plan liabilities to Prudential.

(d) Which option is better? Why?