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Pension Risk Transfers and Annuity Payout Trends


     By ERISA Benefits Consulting, Inc. ERISA, Pensions, Fiduciary Liability, Group Life/Health Plans, & Labor Relations Expert Witness

PhoneCall Mark Johnson, J.D., Ph.D. at (817) 909-0778


Expert Witness: ERISA Benefits Consulting, Inc.
Lump sum payouts by U.S. corporate pension plans are gaining in popularity, resulting in a slight drop in the amount of total assets held by the world’s largest pension funds.
The world’s top 300 pension funds saw a three percent decline in 2015 total assets, compared to growth of 3 percent in 2014, according to a recent study published by Willis Towers Watson and Pensions & Investments. The U.S. is the leading country worldwide in terms of pension fund assets, with 38 percent of total assets. Japan is in second place with 12 percent.

Despite the recent year-over-year decline, U.S. pension assets have actually grown over the past five years from $4.9 trillion in 2010 to $6.5 trillion in 2015, reports Willis Towers Watson.

Pension fund managers continue to use “pension risk transfer” techniques to remove pension liabilities from their balance sheets by offering plan participants the chance to take a lump sum payment or an annuity.

More than half (56 percent) of U.S. companies surveyed by management consulting firm Aon Hewitt reportedly offered former employees the opportunity to take a lump sum payout in 2016. This represents a significant increase from 44 percent offering such plans in 2015 and an even smaller 12 percent in 2014.

Recent premium increases by the Pension Benefit Guaranty Corp. (PBGC) may be one reason behind the push for pension risk transfers. The PBGC premium per participant is $64 in 2016, compared to $35 in 2012. Low interest rates are another factor in risk reduction trends, along with increased mortality.

WestRock, a U.S. packaging company formed in 2015 following the merger of MeadWestvaco and RockTenn, recently completed a $2.5 billion purchase of a group annuity contract from The Prudential Insurance Company of America. Assets from the WestRock Company Consolidated Pension Plan were used to transfer payment responsibility for retirement benefits owed to approximately 35,000 U.S. retirees and their beneficiaries. The transaction is expected to reduce WestRock pension obligations in the U.S. by 40 percent.

In a separate action also intended to encourage plan participants to consider annuity options, the IRS and Treasury Department last month issued final regulations titled, “Modifications to Minimum Present Value Requirements for Partial Annuity Distribution Options Under Defined Benefit Pension Plans.”

The IRS rules relate to defined benefit plan distributions. The permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or other more accelerated form. Plan participants, beneficiaries, sponsors, and administrators of private sector, defined benefit pension plans are all affected by the IRS regulations.

In the past, defined benefit plan participants were asked to choose between either a lump sum payment or an annuity for lifetime income. Under the new IRS rules, retirees will be given the choice to combine an annuity with a lump sum payout.

The ability to “bifurcate” defined benefits into both a single payout and an annuity does not impose any requirements on either the plan sponsor or the participant. Rather, it is intended to simplify the payout process.

Plan years beginning on or after on or after January 1, 2017 are subject to the IRS rules regarding annuity distributions. A plan participant can also elect to apply the rules to an earlier period.

ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D.
Mark Johnson, J.D., Ph.D. is an ERISA expert witness who consults on litigation in the areas of the Employee Retirement Income Security Act (ERISA), pensions, health plans, 401(k) plans, retiree medical, fiduciary liability and labor relations.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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