J.C. Penney (JCP) Announces Reduction in Pension Obligations; Will Transfer 'Substantial' Portion to Prudential

October 2, 2015 6:47 AM EDT
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J.C. Penney (NYSE: JCP) announced actions that will significantly reduce the benefit obligation of its qualified pension plan ("the Plan") without requiring any cash contribution from the Company. JCPenney recently completed a lump-sum offer for select participants in the Plan, and it has also entered into an agreement with The Prudential Insurance Company of America (NYSE: PRU) ("Prudential") to purchase a group annuity contract that will settle a substantial portion of JCPenney's remaining retiree pension benefit obligations. After the closing of these transactions, which is anticipated later this year, the Plan is expected to remain over-funded on both accounting and ERISA bases, and the Company expects that it will not be required to make cash contributions to the Plan for the foreseeable future.

Ed Record, chief financial officer said, "We are grateful for all the contributions our retirees have made to JCPenney. We are confident that Prudential, an expert in this field, will provide great service to our retirees receiving monthly payments." Record continued, "These actions not only continue to provide excellent benefit security for our retirees, but also further the Company's objective of de-risking the Plan while improving the Company's long-term risk profile."

Approximately 12,000 retirees and surviving beneficiaries elected to receive voluntary lump-sum payments to settle the Plan's pension obligation to them. In addition, approximately 1,900 former employees of JCPenney who have deferred vested benefits elected to receive voluntary lump-sums. The response deadline for the lump-sum offer was September 18, 2015, and the Plan expects to make the lump-sum payments in November once the final settlement amount is determined.

In conjunction, JCPenney has entered into a definitive agreement to purchase a group annuity contract from Prudential, under which Prudential will pay and administer future benefit payments to select retirees. The agreement provides for the Plan to transfer a portion of its obligations and assets to Prudential, and the transfer would leave the remaining Plan over-funded on both accounting and ERISA bases. The annuity transaction is expected to close in December 2015, and its final size is subject to the condition that the Plan remains overfunded at closing. If market conditions warrant, closing may be extended to 2016. After closing, Prudential will assume financial responsibility for making the annuity payments as provided in the group annuity contract.

Retirees and beneficiaries whose benefit obligations are transferred to Prudential will receive individualized information packages with further details and answers to frequently asked questions.

JCPenney's Benefit Plans Investment Committee hired an independent party, Fiduciary Counselors Inc., a leading independent fiduciary services firm, to represent the Plan and all of its participants and their beneficiaries, including those remaining in the Plan, to select the safest available annuity as defined by U.S. Department of Labor standards. Fiduciary Counselors selected a Prudential contract that provides an additional safeguard by segregating assets in a separate account dedicated to the payment of benefits to Plan retirees and their beneficiaries.

The actions announced today should reduce the pension obligation by 25-35% and the number of participants in the Plan by 25-35%. Although the Plan has been fully funded since 2009, owing to successful execution of the Company's asset de-risking strategy, market conditions were favorable to reduce the obligation now.

These transactions may result in a non-cash pension settlement charge with the impact to be determined at the closing of the transaction. This charge will be excluded from the Company's 2015 adjusted results. These actions continue a series of steps taken to reduce pension volatility and further de-risk the pension while maintaining a competitive benefit for associates. Previous steps include changes to Plan design, past contributions to maintain a well-funded pension Plan status, matching the Plan's asset allocation to the pension's liability profile, and offering participants who separate from the Company the option of a lump-sum settlement payment.



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