Three Compelling Reasons to Consider Pension Plan Mergers

If you have more than one pension plan you are administering, consider a pension plan merger to potentially reduce plan administrative, Pension Benefit Guarantee Corporation (PBGC), and future plan termination fees. Sound too good to be true? Read on.

While the total number of pension plans may have dwindled over the past few decades, several companies still sponsor not only one, but multiple pension plans for participants within their organization. Most typically this is the result of a decision made years ago when the retirement plans were created or acquired – either to intentionally separate participants with different benefit formulas such as Hourly Plans for union employees earning a service related benefit, Salaried Plans for employees earning a pay related benefit, or as a result of an acquisition where the plans benefitting employees are not original employees of the parent company.

While there may have been reason to keep the plans separate in the past, it might be time to reevaluate and consider whether a pension plan merger might be beneficial.

“It might be time to reevaluate and consider whether a pension plan merger might be beneficial.”

What is a Pension Plan Merger?

A pension plan merger is the consolidation of one or more pension plans into a single, previously existing pension plan. 

Consider Company X who maintains 3 pension plans: 

  • Plan A benefits all Hourly, union employees
  • Plan B benefits all Salaried employees
  • Plan C benefits all participants acquired by Company Y

A pension plan merger is the transfer of all retirement plan assets and liabilities from Plans A and/or Plan B into Plan C (or some other similar combination) and as a result, Plan A and/or Plan B would cease to exist.

Pension Plan Merger Example

Going forward, annual requirements remain only for the consolidated plan. Because the merger cannot violate anti-cutback rules, there is no negative impact to the retirement plan participants. Protected benefits such as accrued and early retirement benefits, subsidies, and optional forms of benefits cannot be reduced.

Why Should We Consider Merging Pension Plans?

Reason #1 : Reduced Administrative Fees

Each qualified pension plan has several annual requirements, regardless of size. Combining plans can reduce total administrative fees by minimizing the redundancy of the annual actuarial, audit, and trustee work:

  • Annual valuations: Funding, accounting, and ASC 960
  • Government reporting: IRS Form 5500 and PBGC filings
  • Participant notices: Annual funding notices
  • Annual audit: Plan audit for ASC 960 and financial accounting audit
  • Trustee reports

Merging plans can streamline many processes, reducing fees for these services compared to operating separately.

Reason #2 : Potential PBGC Savings

Plan sponsors with both an underfunded and overfunded plan can reduce PBGC premiums by sharing the excess retirement plan assets of an overfunded plan with one that is underfunded. Annual premiums are due to the PBGC (Pension Benefit Guarantee Corporation) for protection of participant benefits in the event the plan sponsor is unable to fulfill their pension promises. Plans that are fully funded pay only a flat rate premium based on headcount. Underfunded plans pay an additional variable rate premium (VRP) based on the total unfunded liability for the plan (capped by participant). Merging an underfunded and overfunded plan can create a combined fully funded plan, eliminating the variable portion of the cost or premium due to the PBGC as shown:

Consider Company X who maintains 2 pension plans: 

  • Plan A has 580 Hourly participants with a PBGC shortfall of $10 million as of 1/1/2019
  • Plan B has 1,160 Hourly participants with a PBGC excess of $10 million as of 1/1/2019
  • Plan A merges into Plan B with 1,740 participants and no shortfall as of 1/1/2019
Impact of Pension Plan Merger on PBGC Premiums

By merging Plan A into Plan B, the shortfall is eliminated and PBGC premiums due are dramatically reduced with considerable financial impact.

Reason #3 : Plan Termination on the Horizon

Similar to the administrative savings of merging two ongoing pension plans, there will likely be reduced fees related to the process at termination. The final step in distributing retirement plan assets will be the agreement between the insurance company taking over the responsibility for all future benefit payments of remaining participants. Merging plans will consolidate the transaction and increase the number of participants affected, potentially resulting in annuity purchase cost savings to offset the underfunded liability  at final distribution. If plan termination is on the horizon, especially for two small to mid-size pension plans, a plan merger may prove to be a valuable first step with potential positive financial impact.

We Want to Merge our Pension Plans…Now What?

In most scenarios, the process is fairly straightforward. There will be a few adjustments required to the valuation process in the first year, but going forward will operate as usual. Participants will be notified of the change, but there will be no difference to the way that their benefits are calculated or administered.  

The plan sponsor will also be required to do the following:

  • Execute a plan amendment describing the plan merger
  • Modify the plan document to reflect the new consolidated plan
  • File Form 5310-A with the IRS no later than 30 days prior to the merger

Regardless of the size of the plan, a plan merger may be a step in the right direction toward simplifying the administration and cutting costs for many organizations sponsoring more than one pension plan.  Merging multiple pension plans is most often one example in the pension world where less is more. Finally, there are instances where a merger may result in increased costs (PBGC premiums) or may present other challenges.

Each situation is unique so don’t make any assumptions without consulting your actuary. And don’t overlook the importance of a communications strategy to inform participants of any changes which take place.

Questions? For more information, contact the Findley consultant you normally work with, or contact Debbie Sichko at, 216.875.1930.

Published on August 15, 2019

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IRS Announcement May Allow Lump Sum Window for Retirees


Pension plan sponsors may have a new tool available to use in de-risking their pension plans – paying lump sums to retirees currently in payment status. As with some other de-risking initiatives, a retiree lump sum window could accomplish the reduction in PBGC headcount premiums as well as reduce the size of the plan liability and therefore reduce the risk to the organization.

Through the release of IRS Notice 2019-18 on March 6, 2019, the IRS officially announced that there will be no amendments to the minimum distribution regulations under IRC 401(a)(9) to address the retiree lump sum window concerns raised under Notice 2015-49. In addition, the IRS says that until further guidance is issued, they will not claim that a plan amendment providing for a retiree lump sum window program causes the plan to violate minimum distribution regulations. However, they will continue to evaluate whether such an amendment would cause concerns in regards to other sections of the IRS Code, namely those sections dealing with non-discrimination, vesting, benefit limits, optional forms of payment, and benefit restriction rules.

While IRS Notice 2019-18 does not make the legality of retiree lump sum windows perfectly clear, and the IRS has stated that it will “continue to study the issue of retiree lump sum windows,” plan sponsors interested in possibly utilizing this de-risking technique should discuss the approach with their ERISA counsel and actuary to get a better understanding not only of the legalities, but the advantages and disadvantages associated with the approach. Some of these are listed below.

Advantages and Disadvantages of a
Retiree Lump Sum Window


  • PBGC Premium reduction
    • Plan sponsors will save money annually for each retiree that takes a lump sum.
    • Premiums are based on participant counts and depending on the funded status of the plan, plan sponsors could save between $80 and $600 per person each year.
  • May provide positive balance sheet impact
    • In the current interest rate environment, there are many plans where lump sums may be less expensive than current accounting liabilities.
    • End of year funded status may improve as a result of paying out lump sums.
  • PBGC funded status may improve in the current interest rate environment
    • Variable Rate premiums could be reduced.
    • 4010 filing requirements may no longer be required.
  • One step towards full plan termination
    • Lump sums to retirees would reduce the size of the plan and take the plan sponsor one step closer to full plan termination.
  • Reduced administrative expenses
    • Fewer 1099s will need to be distributed.
    • Payment processing fees will decrease.
  • Reduction in headcount may lead to exemption from certain compliance requirements:
    • Control groups below 500 participants are exempt from at-risk provisions of the Internal Revenue Code.
    • PBGC 4010 filing requirements are eliminated if the headcount of the control group falls below 500.
    • A plan audit is no longer required if plan size reduces to less than 100 participants.


  • Additional pension expense and funding requirements
    • The lump sum window could trigger a one-time additional pension expense in the year lump sums are paid. The amount of expense will depend on the amount of lump sums paid as well as the balance sheet position at the end of the fiscal year.
    • A retiree lump sum window may lower AFTAP funding percentage and lead to increased minimum funding requirements.
  • Increase in volatility
    • Retirees are the most stable group of participants in terms of liability.
    • Removing all or a portion of retirees will make the plan’s liability more unstable and can make it harder for plan sponsors to plan or budget.
  • Plan termination will be more costly
    • Retirees have the least per person cost in an annuity purchase.
    • Annuity providers will charge a higher premium when being offered a plan with a relatively small group of retirees.
    • Many annuity providers will also choose not to bid on plans that have previously offered retirees lump sums.
  • Adverse selection
    • Retirees who opt to take the lump sum are more likely to be in poor health, and more likely to die before their actuarial life expectancy. By taking a lump sum today, they are being paid for future benefits that they might not otherwise survive to receive and therefore the plan could be overpaying this liability.
    • Retirees left in the plan are typically healthier and have a longer payment stream, making the remaining group a more expensive population to fund and later insure.

Another Option

Plan sponsors do not have to offer lump sums to their entire retiree population. This approach allows the plan sponsor to benefit from the advantages described above but also avoids the potential disadvantages. The retiree group can be carefully selected to maximize the results of the window.

Final Thought

Clearly there is a lot to consider and each plan and plan sponsor is different. Therefore it is highly recommended that plan sponsors review their plan with their actuary and ERISA counsel to determine if offering lump sums to retirees is an ideal strategy.

Questions? Contact Wesley Wickenheiser at 502-253-4625, or Amy Gentile at 216-875-1933,, or the Findley consultant whom you normally work with.

Posted March 8, 2019

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