Learn simple strategies to reduce PBGC premiums and the benefits and challenges of the de-risking options with Findley’s Matt Klein.
Wednesday, September 16, 2020
2 PM EST
Learn simple strategies to reduce PBGC premiums and the benefits and challenges of the de-risking options with Findley’s Matt Klein.
Wednesday, September 16, 2020
2 PM EST
On October 7, General Electric (GE) announced a series of decisions around their salaried pension plan:
Inevitably, whenever one of the largest pension plans in the country makes an announcement like this, it can cause executives at other companies to question if a similar decision makes sense for their plan. The action item here most germane to other plan sponsors, and the focus of the remainder of this article, will be to focus on the middle bullet point. Offering lump sums to non-retired, terminated participants has become a popular strategy among pension plan sponsors the last couple years as a way to reduce headcount without paying a premium to an insurance company to off-load the obligations.
A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window. Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.
Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction.
An advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. Employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits in most cases. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk.
The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat-rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.
These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some pension plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.
There are some concerns that pension plan sponsors will also want to consider such as:
The pension plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.
Some pension plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley article provides tips to map your route to pension plan termination readiness. Already have a frozen plan and been considering a termination in the near future? For a complete A-Z walkthrough, check out our guide below.
Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at amy.gentile@findley.com, 216.875.1933 or Matt Klein at matt.klein@findley.com 216-875-1938.
Published on October 8, 2019
© 2019 Findley. All Rights Reserved.
Pension plan sponsors looking for significant cash savings and de-risking opportunities have another favorable environment to pull the participants’ lump sum cashout lever this year. But that lever includes several options and considerations. In 2019, the interest rate environment is favorable which gives pension plan sponsors an opportunity to provide lump sum payments to participants while improving the funded status of the plan. So why wait to offer this cashout opportunity when you have this significant benefit staring you right in the face?
A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window but can also be made a permanent feature of the plan with potentially significant financial impact. Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.
Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction
In 2019, the lump sum interest rate environment is favorable for most employers thanks to a significant interest rate increase during 2018 when lump sum interest rates are locked in for 2019 calendar year plans. These higher rates will result in smaller lump sum payments when compared to 2018 (15-20% decrease).
Another advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. In other words, interest rates used for 2019 calendar year plans to determine accounting liabilities are lower than lump sum rates. Therefore employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk. This interest rate arbitrage is not expected to exist in 2020 since defined benefit lump sum interest rates have continued to decrease since the beginning of 2019.
The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.
HOW TO CALCULATE THE PBGC PREMIUM
Flat Rate (per participant) + Variable Rate = PBGC Premium
These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some defined benefit plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.
Employers that have previously offered a lump sum cashout to participants should be aware that this doesn’t exclude them from pursuing a de-risking program again. In general, as long as plan sponsors wait 3-4 years between similar programs, they can offer the same program to plan participants again. This gives participants who have terminated since the original program an opportunity to take their pension payment. A second round offering also gives participants from the first program a second chance to take a cashout while de-risking the plan for the plan sponsor.
There are some concerns that plan sponsors will also want to consider such as:
In summary, 2019 is an ideal year given the lump sum interest rates. The current interest rate arbitrage provides pension plan sponsors a low cost opportunity to de-risk the pension plan and save significantly on future PBGC premiums. As with any de-risking opportunity, there are several considerations that should also be discussed. The defined benefit plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.
Some plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley white paper provides tips to map your route to pension plan termination readiness.
Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at amy.gentile@findley.com, 216.875.1933.
Published on June 7, 2019
© 2019 Findley. All Rights Reserved.