Title Image

Pension Plan Lump Sum Windows

Pension Plan Lump Sum Windows

Keeping Your Pension Plan Cost Effective

windowIf you sponsor a defined benefit pension plan for your employees, you are likely already well aware of the monetary risks associated with offering this type of retirement plan. The term pension plan risk reduction (or de-risking) refers to the practice of limiting such financial risks. There are several risk reduction strategies one can use. In this post, we will focus on the method of settling a portion of the benefit obligations by offering a one-time lump-sum payment option (lump-sum window).

Lump-Sum Windows
To settle the benefit obligations is to remove the obligation of future benefit payments from a retirement plan. Over the past few years, lump-sum windows have become a very popular method for accomplishing this. So popular, in fact, that the Pension Benefit Guarantee Corporation (PBGC) is going to require the reporting of data related to any de-risking activities beginning with 2015 annual filings.

According to a recent AON Hewitt study, 47% of all companies with pension plans will initiate a lump-sum window in 2015.  While AON’s study is mostly very large plans, lump-sum windows can save money for any plan.

Why Now
It’s not surprising that de-risking with lump-sum payments is so popular right now. It improves the financial statements by removing pension liability and the associated risks from the balance sheet. The key factors driving this strategy include:

  1. Rapidly increasing per head PBGC premiums (+16% for 2015).
  2. Increase in PBGC rate charged on unfunded liabilities.
  3. Favorable mortality tables expected to change in 2017.
  4. Currently favorable interest rate environment.


As a result, many plan sponsors have been pushing to implement their lump-sum windows before the end of 2015 to realize the additional cost savings.

It’s Not Too Late
In August 2015, the IRS announced that the new mortality tables will not be effective in 2016. More time will be needed to allow for public comment and implementation. None of the factors discussed above have changed, so if a lump-sum window was under consideration in 2015 but not implemented, the “window-for-windows” is open for another year.

Other Cost Considerations
While it is true that a lump-sum window will lower the costs for the sponsor under current market conditions, there are two other important considerations: the former employee group itself and the financial statement “settlement” costs.

To be cost effective, the lump-sum offer must ultimately be accepted by a significant number of former employees who are not yet receiving benefits.  Here are the key factors that drive acceptance rates:

  1. Relatively large former employee group eligible for the offer.
  2. Eligible group has not been offered lump-sum settlements before.
  3. Planning, communication and execution of the offer.


Another consideration is that the lump-sum amount that is offered is required to include only the value of the benefit at normal retirement date. The lump-sum amount may exclude the value of certain plan features, such as generous early retirement benefits. It is worth analyzing the pros and cons of paying larger lump-sums.

Typically, the cash cost to implement a lump-sum window is limited to implementation fees, but there could be a significant financial statement cost, i.e. settlement accounting cost. The ultimate settlement cost, realized at the time the window is implemented, is determined by arcane pension accounting rules that are beyond the scope of this post. However, an estimate of the potential range of settlement costs should be included in the cost benefit analysis used to determine whether or not to offer a lump-sum window.

Act Now
While it is important to thoroughly explore all risk reduction avenues, offering a one-time lump-sum payment option could potentially save quite a bit of money in the future. If you act now, it is not too late to take advantage of the current mortality tables and other favorable factors enabling lump-sum payments at a lower cost. Settlement of plan obligations for a portion of your plan participants can be an effective strategy yielding positive long-term results.

Paul Withington
Consulting Actuary