Photo: AP

J.C. Penney Co. has said it will reduce pension obligations by $5 billion, or 25 to 35 percent of its liabilities, based on a new buyout agreement with Prudential Insurance Co.

The Plano, Texas-based retailer did not reveal the size of the deal, but it did say the pension will remain overfunded when the deal is closed at the end of the year.

The company also said that about 12,000 plan retirees accepted a lump-sum buyout. About 31,000 retirees were offered the option up until September 18.

That offer was made shortly after the Internal Revenue Service announced a prohibition on lump-sum offers to existing retirees, effective July 9, 2015. 

Going forward, the IRS said only increases to “ongoing” annuity payments will be allowed, and not payments that “accelerate” payment of pension obligations, as is the case in lump-sum buyouts.

Companies that had initiated a lump-sum offering before the prohibition were allowed to consummate the deals, the IRS said.

The IRS did not outlaw lump-sum offers to terminated vested participants. As part of its larger strategy to shed pension obligations, J.C. Penney offered 8,000 terminated vested participants a buyout.

About 1,900 accepted, according to a company release.

Prudential will also assume about $450 million of pension obligations, or half of a deal affecting 14,000 retirees of the U.S. subsidiary of Royal Phillips.

Legal and General America will assume responsibilities of the other half of the buyout, which totals $900 million.

And American United Life Insurance, a OneAmerica company, will be issuing another $200 million in pension buyouts to Royal Phillips workers who have retired since May 2015.

The deals with all three insurance companies will affect 17,000 participants.

Legal and General America is the U.S. insurance subsidiary of U.K.-based Legal and General Group Plc.

As many as eight U.S. insurers have been active in the pension buyout market stateside, according to Matt McDaniel, U.S. defined benefit risk leader at Mercer.

Others are looking to grow into the business, he said, as are more insurers based in the U.K., a much more mature de-risking market than in the U.S., according to McDaniel.