With corporate pension funding levels at an average of 93 percent — the highest since 2007 when they were at 107 percent — professional services consultant Towers Watson says current retirees are increasingly likely to get a lump-sum buyout offer.
Getting rid of the risk of having a pension plan on the books has become a major goal for many companies, says Dave Suchsland, a senior retirement consultant at Towers Watson. One reason is the new federal budget deal, which significantly raised what companies must pay to the Pension Benefit Guarantee Corp., or PBGC, to ensure that workers will get their pensions. A second reason, Suchsland cites, is that new mortality tables will be released later this year that predict much longer lifespans, pushing up potential pension costs still higher.
Meanwhile, company pension costs are affected by corporate bond rates: the lower the interest rates, the higher the liability. Rates are rising now and that lowers the cost of paying out lump sums. Suchsland says that although there is a possibility rates could go still higher, he believes many companies aren’t positive that will happen and are inclined to unload the risk while rates are at a reasonable level, they have money to work with and the new mortality tables are still under wraps.
If you have an old-fashioned pension, what does that mean for you? There are two ways your former employer can go about this: It can offer cash to buy you out or it can pay an insurance company to take over its liabilities and the administration of your pension.
Suchsland says it is generally cheaper for a company to make lump sum offers, but federal law prevents them from forcing you to take their deal.
Paying an insurance company to take over the plan is more expensive for a company, he says, because the insurer will factor administrative costs, increased longevity and a profit for itself into the price it charges, but the corporation unloads any ownership of the plan — and any liabilities. The insurance company may or may not choose to offer you a lump sum, and if it does offer a lump, it can’t force you to take it.
If you get a lump-sum buyout offer, one reason your former company likely finds the deal appealing is because it expects you are going to live a lot longer than it used to believe you would. That regular retirement pension payment may look mighty good when you are 103.
Leon LaBrecque, an attorney and CPA who specializes in pension planning, says he recommended that about 60 percent of his clients who got offers from Ford or GM stick with their monthly pension and 40 percent take the lump.
Factors that may affect the decision include health — are you currently dealing with a major illness that could end your life soon? — and your overall economic situation. For instance, if two halves of a couple both have generous pensions, it may make sense to take a lump sum offer on one pension and use the cash to increase liquidity and investment options.
LaBrecque says it is a very personal retirement planning decision, and it’s wise to thoroughly mull over the potential impact if there could be an offer in the wings.