GE pension changes: should my company be looking to do the same?

On October 7, General Electric (GE) announced a series of decisions around their salaried pension plan:

  • For participants continuing to accrue benefits, further accruals will be stopped at the end of 2020. (New employees hired after 2011 were not eligible for the pension plan.)
  • A lump sum buy-out proposal to 100,000 terminated but not yet retired participants will be offered.
  • Benefits in a supplemental plan for certain executives will also freeze.

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.

Lump Sum Cashouts Defined

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.

Advantages of Implementing Lump Sum Cashout Today

1. Improved Funded Status

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.

2. PBGC Premium Savings

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.

Other Considerations When Planning for a Lump Sum Cashout

There are some concerns that pension plan sponsors will also want to consider such as:

  • Potential increases to contribution requirements;
  • One-time accounting charges that could be triggered;
  • Potential increase to annuity purchase pricing upon pension plan termination. Note that a permanent lump sum feature may increase pension plan termination annuity pricing and cause some insurers to decline to bid.

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

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Mapping Your Route to Pension Plan Termination Readiness

Trying to nail down the financial aspect of being ready to terminate a pension plan is like trying to hit a moving target. And, unfortunately, it is not the only consideration to determine if your pension plan is ready to terminate. A qualified plan termination is a multi-step, government-regulated process. It involves multiple parties, requires accurate participant data and benefit information, and includes managing the resources and messaging for several required communications with plan participants. It also requires leadership involvement and effective change management to determine a successful implementation strategy. Assessing the status of all these aspects will lead to the successful execution of a termination strategy that is predictable and efficient.

Terminating a plan is not something most organizations do more than once. So it is unlikely that you have a prior project plan saved on your company network. Typical project management approaches will require months to coordinate all the people involved and all the decisions that need to be made.

Using Findley’s approach, as an alternative to typical project planning, can dramatically accelerate the process.

Determine Your Destination:

Gather Background Data and Assess Current Status

The first phase of your process should focus on developing some financial projection analyses and assessing the current status of the plan. This will give stakeholders a baseline understanding of your time horizon, the biggest areas you will need to focus on to get ready, and the capacity of your team to take on tasks related to the termination.

A fully funded plan, measured on a termination basis, is a moving target with several factors that influence the funded level over time (asset returns, cash contributions, interest rates, etc.). Actuarial analytics, projections, and interactive scenarios, that can be modeled with a tool like Findley’s PlanTermTM Financial Modeler, show how possible future economic conditions could affect your plan and will provide critical data for stakeholders to understand which variables have the most impact, and how they all interact.

Outside of the financial aspect, a review of the plan document provisions and compliance and an assessment of historical data will uncover any additional work needed.

Plan Your Itinerary:

Define Your Objectives by Leveraging a Collaborative Session

Defining your multi-year strategy requires key leadership engagement and effective change management. C-suite leaders understand the importance of this preparation but are often challenged to find the time required for the typical strategic planning approach. To overcome this, a compressed planning session, like Findley’s Rapid MapTM session, can be used to form the basis of the strategic plan and build consensus around the priorities and action items.

A trained facilitator addresses important issues connected to the plan termination process in a systematic and focused manner. The Rapid MapTM approach is a proven technique used to:

  • Reach decisions on strategic objectives in a compressed timeframe. In the course of one afternoon, the process can be used to develop and prioritize objectives related to the plan’s readiness to terminate.
  • Build consensus among the many stakeholders. Internally, this group of stakeholders is likely to include key members of your executive, finance, and HR teams. Externally, it also may involve your investment advisors, annuity consultants, actuaries, third party benefit administrators, and ERISA legal counsel.
  • Outline key communications priorities. There are many required communications that must be sent over the course of the plan termination. It is important to discuss a communication strategy that includes the timing, target audiences, key messages to be delivered, who will deliver those messages, and the communication channels you will use.

The trained facilitator will lead a prioritizing activity to define and map out the top goals and objectives that become part of your strategic plan. Action steps are then refined in the last phase.

Start Your Trip:

Create, Implement, and Monitor Your Multi-Year Strategic Plan

In this final phase, project leaders manage the multi-year milestones and implement the change management strategy developed in the planning session. Once the strategic plan is set, a detailed change management project plan defines each year’s implementation steps and timing. Monitoring actual vs. forecast experience begins immediately and continues throughout the course of the multi-year strategic plan. The interactive forecast modeling tool established in the first phase becomes a key tool for ongoing monitoring of financial readiness to terminate, and will also indicate if economic conditions are causing time horizon changes.

While waiting for the plan to be financially ready to terminate, use the time to tackle other objectives identified during the planning session. This might include research into historical data sources, finalization of any benefits that are not already certified, and locating lost participants. You may also need to engage an annuity consultant or identify a partner to outsource some or all of the administrative functions to handle the expected increase in volume.

Plan termination communications can also be tackled during this time. Effective communications will make sure participants are well-informed about their decisions while helping to anticipate and alleviate concerns. Be sure to leverage the opportunity to tailor the messaging and layout of the required notices to be consistent with your company or benefit program branding.

In Perspective

Once the plan termination has begun, the steps in the process are defined by several governmental agencies, and each step has specific timing requirements that make all of the steps interrelated. So, once you start, you need to be ready to progress through the steps at a regular pace.

To make the plan termination process run predictably, smoothly, and most efficiently, the best approach is to assess your readiness well ahead of time and have a strategic plan and process in place.

Questions? For additional information about developing or enhancing your strategic plan, contact the Findley consultant you normally work with, or Colleen Lowmiller at Colleen.Lowmiller@findley.com, 216.875.1913.

Posted January 15, 2019