Lump-sum payouts moving into fast lane
Highway law accelerates corporate plan actions
Published: October 15, 2012 - Pensions & Investments
The pension funds of GM and Ford were the first to venture down the road of
lump-sum payments, but the federal highway law has turned that road into an
expressway with at least 10 other companies following suit.
The increase in lump-sum payment offers to vested participants in defined
benefit plans comes after this summer's highway law allowed more plan sponsors
to offer lump-sum payouts than were permitted under the Pension Protection Act.
It also included future hikes in premiums.
Among the companies announcing lump-sum offers since the automakers' offers
are A.H. Belo, Sears Holding, NCR Corp., Archer Daniels Midland, Energy Future
Holdings, Equifax, New York Times, Visteon, Thomson Reuters and Yum! Brands.
gIt's something that was brought to us by our advisers, and I think it's an
opportunity to save expenses in the plan,h said Alison Engel, Dallas-based
senior vice president and CFO at A.H. Belo Corp., which announced a lump-sum
payout offer Oct. 5.
Belo's offer was made to about 30% of the vested participants in its two
defined benefit plans. Those participants have benefits with a present value of
$30,000 or less. Most have until mid-November to decide on opting out or not,
Ms. Engel said.
Ms. Engel said Fidelity Investments, Boston, recommended the specific offer
to participants with low balances that gtake a lot of administrative expense and
time.h
General Motors Co., Detroit, in June and Ford Motor Co., Dearborn, Mich., in
April made lump-sum offers to both retirees and former employees who have yet to
accrue benefits. But most of the other firms are only making the offer to former
employees.
Philosophical hurdle
Matt Herrmann, St. Louis-based leader of Towers Watson & Co.'s retirement
risk management group, said in a telephone interview that he has seen a
gdramatic trendh toward companies being interested in offering vested former
employees lump-sum payouts, based on client inquiries.
gThere's the size of the retiree population, your expectation of whether your
retirees would want the lump sum, and expectations of where you're going with
the plan,h he said. gTerminated vested (participants) are folks who probably in
some sense have the easiest philosophical hurdle to get over. You're going to
them with an option: Do you want to take this or wait 10 years for your
benefits?h
gMany of our clients are considering doing this in future years or are
considering it in 2012,h said Sean Brennan, New York-based principal and senior
consultant in the financial strategy group at Mercer LLC.
gIn offering lump sums to terminated (vested participants), we are talking to
very many of our clients and plan sponsors about it. A lot of them view it as
one of the most effective ways to manage pension risk,h said Mr. Brennan.
Mr. Herrmann also said he expects more lump-sum offers will be made to active
vested employees as they leave an organization.
The pending increase in Pension Benefit Guaranty Corp. premiums under the
federal highway bill, signed into law by President Barack Obama July 6, also has
helped spur more companies to make lump-sum offers, according to Mr. Herrmann.
Employers see cutting the number of participants results paying less in
premiums.
Under the new law, premiums for single-employer plans will increase to $42
per participant in 2013, from $35, and to $49 in 2014, after which they will be
indexed for inflation, gI think that not just that specifically, but the
uncertainty for the potential for PBGC premiums in the future, those were
considerations,h said A.H. Belo's Ms. Engel.
PBGC premium savings
Deborah Forbes, executive director of the Committee on Investment of Employee
Benefit Assets, Washington, said in a telephone interview, gWhen you look at the
cost of running of a DB plan, the PBGC premium is a piece of that.h
But it's not the only reason, Ms. Forbes said. When consultants talk to
corporate financial executives about taking on the short-term expense of
offering lump-sum payouts, gthey look at (saving on PBGC) premiums many, many
years in the future. That's part of their sales pitch but it's not the sole
determining factor.h
gI think getting the liabilities off the balance sheet and having to deal
with the variables, you've got investment risk, and you've got interest rate
risk. We spend a lot of time asking (Capitol) Hill for some interest-rate relief
and they got that in (the highway bill),h said Ms. Forbes. gThe interest rate is
the biggest factor of valuating your liabilities.h
The new law changed the discount rate calculation to a 25-year historic
average of corporate bond rates from the two-year average previously established
by the Pension Protection Act of 2006. The change can reduce liabilities by
between 10% and 20%.
gThe highway bill and the resulting funded status improvement have enabled
some companies to offer the lump sum that would previously not been able to,h
said Mercer's Mr. Brennan.
To offer a lump sum, companies must reach an 80% funding threshold to meet
PPA requirements. The 10 companies tracked by Pensions & Investments
that have announced lump-sum payout offers since July 31 had reported funding
ratios of between 65% and 78% in their most recent annual reports, before the
passage of the highway bill. Ratios for periods after enactment of the highway
bill could not be obtained.
Of those 10 companies, A.H. Belo had reported the lowest funding ratio, at
65.3%. The company's DB plans, which were closed to new participants in 2000 and
frozen in 2007, had a combined $274.9 million in assets and $420.9 million in
liabilities as of Dec. 31, according to the most recent 10-K filing.
Belo's Ms. Engel said their company was able to go ahead with the lump-sum
payout offer because of the highway bill's funding relief.
gIt puts you in a position from a funding standpoint to give you more
flexibility,h she said. The company is also contributing a total of $32 million
to the plans in 2012 to reach the 80% threshold.
Sears Holding Corp., Hoffman Estates, Ill., had reported a funding ratio of
66.3% as of Jan. 28, according to its most recent annual report. In that report,
the company had announced it would need to contribute $314 million in 2012 and
$740 million in 2013.
Sears announced on Sept. 14 it would offer a lump-sum payout to certain
vested participants in its U.S. defined benefit planand would contribute an
additional $203 million, for a total of $517 million, this year to reach the 80%
threshold to meet requirements in the Pension Protection Act of 2006 to offer a
lump sum.
The company was also able to reduce its expected contribution to the pension
plan in 2013 to $350 million.
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