Lump-sum payouts moving into fast lane

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.

“It's something that was brought to us by our advisers, and I think it's an opportunity to save expenses in the plan,” 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 “take a lot of administrative expense and time.”

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.

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 “dramatic trend” toward companies being interested in offering vested former employees lump-sum payouts, based on client inquiries.

“There'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,” he said. “Terminated 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?”

“Many of our clients are considering doing this in future years or are considering it in 2012,” said Sean Brennan, New York-based principal and senior consultant in the financial strategy group at Mercer LLC.

“In 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,” 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, “I think that not just that specifically, but the uncertainty for the potential for PBGC premiums in the future, those were considerations,” said A.H. Belo's Ms. Engel.

Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, Washington, said in a telephone interview, “When you look at the cost of running of a DB plan, the PBGC premium is a piece of that.”

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, “they 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.”

“I 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),” said Ms. Forbes. “The interest rate is the biggest factor of valuating your liabilities.”

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%.

“The highway bill and the resulting funded status improvement have enabled some companies to offer the lump sum that would previously not been able to,” 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.

“It puts you in a position from a funding standpoint to give you more flexibility,” 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.