By Mark Miller
CHICAGO Nov 19 A growing number of employers
are making plans to "de-risk" their pension plans. That's jargon
for reducing the financial risk posed to corporate balance
sheets by pension plans - but if you have a defined-benefit
pension and you start hearing that term tossed around, pay
careful attention. Less risk for employers can mean more risk
A survey of 180 pension plan sponsors by Towers Watson, the
benefits consulting firm, found that 75 percent have implemented
or are planning de-risking maneuvers. Their motive is to reduce
risk posed by unfunded pension liabilities, which must be
carried on the books as debt and hurt a company's ratings from
De-risking strategies can vary from reducing exposure to
risky equities in pension portfolios to offering lump sum
buyouts to retirees and former workers. In some cases, plan
sponsors have transferred pension obligations to private
insurance companies by purchasing huge group annuities to pay
"Plan sponsors are in a better position than they have been
in a long time to think about a wide range of options," says
Matt Herrmann, head of the retirement risk-management group at
consulting firm Towers Watson.
Traditional pensions have been in decline for years as more
sponsors froze or terminated their plans. Just one-third of
private-sector workers have them, down from 88 percent in 1975,
according to the National Institute on Retirement Security.
If you're already receiving a pension, or expect one in the
future, the lump sum buyout trend bears especially careful
watching. Two big companies, Ford Motor Co. and General
Motors, made news last year with lump sum offers to large
groups of retirees.
The Towers Watson survey finds that employers' interest in
lump sum offers is gaining momentum - fueled by two improvements
in financial conditions that make these deals less expensive for
First, the stock market's gains have sharply improved the
funded status of pension plans. Plans sponsored by S&P 1500
companies stood at 91 percent in October, the highest since the
same month in 2008, according to data compiled by Mercer, the
consulting firm. (If a plan is underfunded, it needs to find the
cash to make whole a retiree who takes a buyout.)
The second factor is higher prevailing interest rates. Lump
sums are calculated using an interest rate pegged to corporate
bond rates; the lower the rate, the higher the lump sum payout.
Towers Watson found that 28 percent of respondents are
either planning to offer lump-sum payments to former employees
next year or in 2015. That's in addition to the 39 percent of
respondents that made lump sum offers in 2012 or 2013.
While de-risking may help corporate balance sheets, it's
unnerving for retirees. "It's frightening for a retiree - here
you thought you were set for the rest of your life with a
pension, and suddenly the rules change," says Karen Friedman,
executive vice president and policy director for the Pension
Rights Center, a non-profit pension advocacy rights group.
CONSIDER THE CONSEQUENCES
A lump sum may sound attractive, especially if it's a
sizable amount, but determining whether it's a good deal depends
on these factors:
- Life expectancy. If you're in good health and have a
family history of longevity, the pension likely will pay out
more to you over time than you could make taking the lump sum
and investing it.
- Other income sources. If you have substantial savings or
other sources of guaranteed income - Social Security or other
pensions - a lump sum may make sense if you have an immediate
need for the cash.
- Size of the lump sum. If the offer is coming from an
employer for which you didn't work long, it's going to be small.
Taking the offer may be attractive simply because it makes
managing your various retirement accounts easier.
- Interest rates. The lump sum is a good deal only if you
are certain you can beat the rate of return (referred to by the
numbers folks as the "discount rate") used to calculate what
your pension is worth as a lump sum. The interest rates vary by
age; the current rate for a 50-year-old terminated vested
participant is 5 percent, Herrmann says. But since future
pension payments are guaranteed, you need to compare that to
what you could get on risk-free investments, like certificates
of deposit or Treasuries - and there are no risk-free
investments in today's market that match or beat 5 percent.
Towers Watson also queried plan sponsors about their
interest in buying group annuities for workers as a way to get
pension liabilities off the books. General Motors' de-risking
plan also included a plan to buy a group annuity from Prudential
for a large group of retirees who opted not to accept the lump
sum offer. In these deals, pensioners continue to receive their
full benefits, but the annuities lack the protection provided by
the Pension Benefit Guarantee Corp, which takes over a plan and
its benefit obligations if a sponsor goes belly-up.
Just 11 percent of survey respondents said they were
considering a group annuity deal, suggesting GM hasn't set a
major trend in motion - at least not yet.