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News & Policy

PBGC, RJR Nabisco Agree on Pension Protection in Tobacco Unit Spinoff

May 12, 1999

The Pension Benefit Guaranty Corporation (PBGC)and RJR Nabisco Holdings Corp. (NYSE:RN) have agreed on protection for the underfunded pensions of R.J. Reynolds Tobacco Co., as part of the spinoff of the tobacco company set for next month.

"In restructuring their business, RJR Nabisco took retirement benefits into account," said PBGC Executive Director David M. Strauss. "They worked with PBGC to strengthen pension security for workers and retirees of R.J. Reynolds Tobacco as it becomes an independent company."

At the time of the spinoff, a large pension plan covering both Nabisco and R.J. Reynolds Tobacco employees will be split into two plans. The portion of the pension plan remaining with R.J. Reynolds Tobacco will cover about 21,000 workers and retirees. PBGC estimates R.J. Reynolds Tobacco's portion of the pension obligations is underfunded by almost $500 million.

Under the agreement, R.J. Reynolds Tobacco will provide over $400 million of financial protection for the new pension plan. This includes a $58 million cash payment into the plan at the time of the spinoff, four annual installments of $58 million each, plus estimated contributions during 2000-2003 to cover newly accrued benefit liabilities. PBGC will receive a $116 million letter of credit from the company to secure the required payments.

The agreement will be in effect for a minimum of five years and will continue thereafter until the pension plan is fully funded on a PBGC basis or R.J. Reynolds Tobacco's unsecured debt achieves investment grade ratings.

PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974 to guarantee payment of basic pension benefits earned by some 42 million American workers and retirees participating in more than 44,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and investment returns.

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PBGC No. 99-25