In early October, Atlanta-based Equifax Inc. announced that it would offer some of its former employees the option of changing the annuity they expected to receive from the company's pension plan into a lump sum of cash.
The consumer-credit reporting agency extended the offer to 3,500 former employees who had left Equifax before Jan. 1 but hadn't started receiving a pension benefit. The offer—employees have until Nov. 16 to accept it—is Equifax's latest effort to shrink the size of the plan so that the company can run it more efficiently, officials say. Equifax isn't alone.
The list of companies offering lump-sum payouts is growing. In addition to Equifax, A.H. Belo Corp. of Dallas and Yum! Brands Inc. of Louisville, Kentucky, also offered lump sums to some participants in October. In September, Thomson Reuters in New York, Archer Daniels Midland Co. of Decatur, Illinois, Sears Holdings Corp. in Hoffman Estates, Illinois, Visteon Corp. in Van Buren, Michigan, and The New York Times Co. in New York were among the publicly traded companies making similar offers to former workers eligible for pension benefits.
Offering lump sums to workers who qualify but haven't started taking payments from their former companies is the latest trend for plan sponsors trying to reduce volatility in their pension plans. When participants take a lump sum, they move out of the plan. That means plan sponsors that cash out participants have a smaller plan with tighter variables including contribution rates and premium payments to a federal insurance agency called the Pension Benefit Guaranty Corp.
In September, nearly a third, or 34 percent, of defined benefit plan sponsors at consulting firm SEI Institutional Group's 2012 Pension Management Strategy Client Conference said that within the next three years, they are considering lump-sum options for qualified former workers.
"There are a large number of plan sponsors doing this in 2012," says Jason Richards, leader for the retirement risk management group of Towers Watson & Co. in St. Louis. "A smaller plan is easier to manage and may require less action from plan sponsors."
Equifax froze its plan in 2008, meaning new employees were not eligible to join. In all, the 3,500 employees who were offered the lump-sum option represent 20 percent, or $630 million, of the company's total pension-plan liability.
"There is no reduced value—it's just a different payout option," says Tim Klein, vice president of public relations at Equifax. "We are doing this to limit the volatility on our pension obligation."
Participants in pension plans, also called defined benefit plans, usually get their retirement dollars in the form of an annuity. By law, companies that want to offer lump sums instead must make sure the plan is at least 80 percent funded, and the lump sum (at the time of payout) must equal what the annuity would be worth in later years.
Two events recently came into play to make lump sums more attractive to plan sponsors. Since 2008, the interest rate used to calculate lump sums has been a combination of the historically low 30-year Treasury bond and modestly higher corporate bond rates.
In general, using a lower interest rate, in combination with other factors in the calculation, usually results in higher lump sums. Higher interest rates produce lower amounts. In 2012, plans need to use only the higher corporate bond rate to process the payout.
Congress also passed a law this summer allowing defined benefit plan sponsors to use a 25-year average of interest rates when figuring out pension obligations. The net result of the law boosts many plans' funded levels, allowing plans to qualify for the lump-sum option.
"It's a boon to many plans," says Jon Waite, director of investment management advice and chief actuary for SEI Institutional Group in Oaks, Pennsylvania. "We are seeing a lot of plans that were 75 percent funded move to 88 percent because of this."
Offering the lump sum doesn't necessarily mean plan participants will take it, experts say. It might be a better idea for older participants to stay with the annuity, but younger participants who are still working might roll the lump sum into a 401(k) plan, says Towers Watson's Richards.
"Generally what we end up seeing is about 50 to 60 percent of participants electing to take the offer," says Sean Brennan, senior consultant for Mercer in New York. "Many of these participants take it because they see value in managing assets on their own."
SEI's Waite says offering lump sums should be part of a plan sponsor's strategy to reduce the risk of defined benefit plans. Other approaches include matching the investment rates on what is in the plan to the interest rate on the plan's obligations, and outsourcing the investment program.
"I stress that plan sponsors should not be making the decision to offer lump sums in isolation," Waite says. "While it is a viable and worthwhile strategy, it is one of the pieces that needs to be considered."
Patty Kujawa is a writer based in Milwaukee. Comment below or email firstname.lastname@example.org.