Last year, companies such as Ford, GM, and NCR Corp. gave their workers the option of converting their monthly pension benefits (annuities) into a lump-sum cash payment.
Look for more and more businesses of all sizes to follow in their footsteps, for a number of reasons.
A recent change to a federal pension funding reform law allows employers to use higher interest rates in calculating total benefit payouts, which reduces the size of the lump sum they offer. A series of IRS “private letter rulings” have permitted individual employers to convert their annuities into a lump sum within a specified period.
Lump sum payments reduce the size of the benefits obligation, as well as the financial risks of changing investment results that can make it hard for employers to predict future pension plan contributions. The smaller the plan, the smaller its assets, the lower the fees paid to investment managers. A reduction in plan assets and number of participants will also help lower overhead expenses — offsetting an increase in the annual base premium per participant from the current $35 to $48 by 2014.
On the other hand, converting from annuity payments to lump sum payouts can mean increased expenses. For example, employers will need to track down participants who have earned a benefit and left the business, but aren’t yet entitled to their annuity. What’s more, federal law requires a company pension plan to be at least 80% funded before it can offer lump sum payouts — which mean that some firms will have to pick up the cost for raising their plan funding level to this standard.
Do lump-sum pension payouts make financial sense for your business? Our benefits consultants would be glad to offer their professional advice at any time.