Finance executives responsible for their companies’ defined-benefit (DB) plans like lump sums.
Evidence supporting that claim can be found in a current research report from Mercer LLC and CFO Research. Titled “Taking the Next Step in Pension Risk Management: Planning to Move Ahead,” the report covers findings from an interview program and a survey of finance executives at U.S. companies with DB plans. And participants in this research showed palpable enthusiasm for using lump-sum payments to reduce the financial risk of their DB plans.
A pension lump-sum distribution is a one-time payment offered to a group of DB plan participants, to be accepted in lieu of their pension benefit. Companies use lump-sum distributions to settle their future pension obligations. In our survey, six out of ten respondents said they had already made one or more lump-sum distributions to different segments of their pension plan participants within the past two years.
And those programs have worked, they say—87% of those who had already offered a lump-sum distribution expressed satisfaction with the outcomes. That could help explain why half of the respondents thought they were also likely to make either an additional or a first-time lump-sum offering within the next two years.
However, those enthusiasts may want to consider pushing up their timetable. First, shortly after the survey was completed, the IRS issued a ruling that essentially puts an immediate stop to lump-sum offerings to retirees who were already in payment status. That takes one de-risking option off the table.
Then, the IRS announced that beginning in 2017, DB plan sponsors will need to base lump sums on new mortality tables. The new tables show that future pensioners can expect to enjoy longer lives, which also means that companies must now account for the additional payments that they’ll be making.
Using one or more lump-sum distributions to offset the increasing liabilities may become an even more attractive option. For plan sponsors eager to take advantage of a full range of de-risking tools, 2016 now seems like it might be a good year in which to take a closer look.
For the full report, “Taking the Next Step in Pension Risk Management: Planning to Move Ahead,” visit http://www.cfo.com/research