USA – Retiree lump sum windows

Isabel Coles  |  25 March 2019

US companies are once again free to offer pensioners and their beneficiaries a cash lump sum in lieu of their remaining pension payments from defined benefit (DB) pension plans.

The last few years have seen many companies offer deferred members a limited time option to exchange their DB pension entitlements for an immediate cash lump sum. These exercises, also known as “lump sum windows”, typically form part of companies’ strategies for de-risking for their pension plans.

Historically, companies (including Ford and GM) have also offered these lump sum windows to their retired pension plan members, giving them the option of taking a cash sum instead of their remaining pension payments. This ability was removed in 2015 when the IRS announced its intention to amend regulations so that with effect from 9 July 2015 pensions in payment must not be replaced with a lump sum or other accelerated form of distribution.

The changes to the regulations did not materialise and in its Notice 2019-18 released on 6 March 2019, the IRS confirmed that it no longer intends to amend the required minimum distribution rules to prohibit lump sum windows for current pensioners in a DB plan. This means that companies are now, once again, able to offer lump sum windows for their retired US pension plan members.

Offering a lump sum window option can have significant benefits: reducing the number of plan members reduces the PBGC premium (the flat rate premium per participant has increased 40% since 2015 from $57 to $80 in 2019), and while plan benefit payments increase in the short term where members select the lump sum option, it reduces the future long-term liabilities to be managed, administered and funded for going forward. It also offers pensioners the option to reassess whether a lifetime pension or a lump sum payment is more appropriate for their circumstances.

However, offering a retiree lump sum window may not be right for all plans. There is perhaps a greater risk of anti-selection with retirees in poor health more likely to take the lump sum, leaving those with longer life expectancies in the plan. Companies’ fiduciary responsibilities under ERISA and, in particular, the need for appropriate communication of the option to retirees should also be considered as part of any exercise. And, as with lump sum exercises for deferred members, corporate accounting implications should be noted: for example, depending on take-up rates companies may be subject to settlement accounting under US GAAP which could result in accumulated unrecognised losses being recognised in the P&L in the year of the exercise.

While we may not see a rush of companies offering retiree lump sum windows, this extra option is nevertheless welcome and worth considering when it comes to de-risking strategies or terminating frozen US DB pension plans.

To discuss lump sum window options and the associated considerations for your US DB plan, de-risking strategies or plan terminations more generally, please contact your MBW International consultant or get in touch.

Isabel Coles

Tel:+44 20 3949 5710

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