The roughly 30% of eligible salaried retirees who have accepted General Motors Co.'s offer to convert their monthly annuity to a lump sum benefit is a solid response to the trailblazing approach that other companies are expected to follow, observers say.
That offer, which GM announced in June, was extended to salaried employees who retired after Oct. 1, 1997, and before Dec. 1, 2011. In all, the offer was made to about 44,000 participants, of which about 13,000 accepted.
In addition, as the second part of its pension derisking strategy, GM purchased a group annuity from Prudential Insurance Co. of America.
The Prudential annuity replaced benefits that salaried employees who retired before Oct. 1, 1997, received from GM, as well as retirees who declined the lump sum conversion offer.
GM said the twin derisking approaches have dramatically reduced the size of its salaried pension plan. On Jan. 1, the plan had $35.9 billion in benefit obligations and $33.3 billion in assets. Now, GM estimates plan obligations have fallen to $9.2 billion and assets to $6.1 billion.
GM is the first to report the percentage of plan participants accepting an annuity-to-lump-sum conversion offer. The automaker, along with Ford Motor Co., were the first to take such an approach to reduce its pension risks. Since then, about a dozen other employers have made annuity conversion to lump sum benefit offers, though those offers have involved participants who have earned a benefit, but are not yet receiving them.
A GM spokesman said last week that while the automaker didn't have a specific acceptance rate in mind, the company is pleased with the results.
Others note that predicting an acceptance rate in such situations would have been difficult because — in the absence of Internal Revenue Service guidance — no employer had made such an offer involving participants receiving benefits before GM and Ford. Prior lump-sum offers have involved plan participants not yet receiving benefits.
“There was zero historical experience to draw from,” said Jason Richards, a senior consultant at Towers Watson & Co. in St. Louis.
In July, however, the IRS said such offers involving retirees receiving monthly annuities do not violate federal pension law or regulations. The IRS determination came in two private letter rulings.
The IRS does not identify those requesting private letter rulings, but their release came after GM and Ford announced they would give certain salaried retirees a one-time right to convert their annuities to lump sums.
In other situations, such as offering a lump-sum payment to employees who terminated employment but are not yet receiving annuities, an acceptance rate of 50% to 60% would not be uncommon, experts say.
“In dealing with a number of these situations, Mercer has seen term vested election rates in the ballpark of 50% to 60%, and we would expect that participants already in receipt of annuities would be less likely to elect lump sums,” said Sean Brennan, a principal with Mercer LLC's financial strategy group in New York. “Based on our broad, overall experience, 30% acceptance for this group would be on the higher side of an expected range.”
The acceptance rate for retirees already receiving benefits compared with younger plan participants would be lower because the retirees likely doubt they would have enough time to significantly boost the total through investments, consultants say.
“A 75-year-old wouldn't feel the same opportunity exists” to earn investment income as a 45-year-old, Mr. Richards said.
Through derisking approaches, employers can reduce their exposure to unpredictable pension plan contributions due to fluctuating interest rates and investment results, as well as reduce premiums they pay to the Pension Benefit Guaranty Corp.
Jerry Geisel is editor-at-large at Business Insurance, a sister publication of Pensions & Investments.