More Pensions to Offer Lump-Sum Payout Windows


By Stephen Miller, CEBS February 15, 2013

In 2012, to decrease their pension risk exposure, several U.S. companies offered their defined benefit (DB) pension plan participants a one-time lump-sum pension payout. A February 2013 survey reportby consultancy Aon Hewitt reveals that more employers plan to follow suit in 2013.

In October 2012 the firm surveyed 230 U.S. employers with DB plans, representing nearly 5 million employees. According to the findings, in 2013 more than one-third (39 percent) of DB plan sponsors were somewhat or very likely to offer terminated vested participants or retirees a lump-sum payout during a specified period, also known as a window approach. By contrast, in 2012 just 7 percent of DB plan sponsors added a lump-sum window for terminated vested participants or retirees.

Though DB plan sponsors can offer lump sums as a standard option, offering them only as a one-time window benefit avoids creating a protected right to the lump-sum option in the future and may produce a higher acceptance rate than an option that is a permanent plan feature, SHRM Online reported last year (see A Lump-Sum Window Can Help ‘De-Risk’ a Pension Plan).

"There is no question, employers are looking for new ways to aggressively manage their pension volatility," said Rob Austin, senior retirement consultant at Aon Hewitt. "In 2012 many DB plan sponsors were exploring options and planning their strategies; we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet."

Fewer Plan Freezes

The survey found that most employers (84 percent) will not make any change to the benefit accruals they offer workers. Of those that were planning changes in 2013:

  • Fewer than 16 percent of employers were somewhat or very likely to reduce DB pension benefits.

  • 17 percent were somewhat or very likely to close plans to new entrants, which results in a so-called frozen plan.

  • Just 10 percent were somewhat or very likely to freeze benefit accruals for all or some participants.

"Over the past few years we've seen fewer pension plan sponsors closing their plans to new entrants or freezing the benefits for current participants," said Austin. "However, employers remain under increasing pressure to manage plan volatility and are planning both smaller actions and bolder moves to manage that risk."

Other De-Risking Efforts

As a first step in their broader de-risking efforts, employers are contemplating what different economic scenarios would mean to their plan:

  • Half were likely or somewhat likely to conduct an asset-liability study in 2013.

  • 60 percent were somewhat or very likely to have their investments better match the characteristics of the plan’s liability through approaches such as liability-driven investing.

"The right de-risking strategy for one plan may not be an appropriate approach for another; most importantly, employers need to consider the funded status of their plans," said Austin. "For example, plans that are overfunded will likely take measures to lock in this position and erase future volatility through actions such as offering lump-sum windows. An underfunded plan will need to take an approach that attentively addresses volatility, such as implementing a glide path investment strategy that will de-risk the plan as the funded position improves."

Cash-Out Option Tips

Defined benefit pension plan sponsors face many challenges in providing a successful cash-out program, according to HR consultancy Mercer's recently released tips for success. Top considerations for plan sponsors include:

1. Positioning the lump-sum cash-out option as another choice for participants to consider.

2. Providing effective and personalized communication to participants to help guide them through their decision-making process.

3. Analyzing data to ensure it’s complete and accurate.

4. Being prepared to answer questions from a variety of stakeholders about the business rationale behind the cash-out offering.

5. Understanding the fiduciary responsibilities as the plan sponsor.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Article:

A Lump-Sum Window Can Help ‘De-Risk’ a Pension PlanSHRM Online Benefits, May 2012

Quick Links:

SHRM Online Benefits Page

SHRM Online Retirement Plans Resource Page

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