The Pension Benefit Guaranty Corp. announced that it will require employers to report offers made to pension plan participants to convert their monthly annuities into cash lump sums.
The Federal Register carried the news earlier in the week that PBGC intends to revise 2015 PBGC premium filing procedures to include the new requirement. Such offers are usually made to employees who have left the workplace but are not yet drawing pension benefits.
In what has become an increasingly popular move, more and more companies are moving to derisk their pension plans. In fact, a survey last year from Towers Watson found that 75 percent of respondents said they were either working on derisking, were planning one or intended to do so by 2015. Half of the surveyed executives said that eliminating defined benefit plans from their companies' balance sheets was a priority.
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In the quest to derisk their pension plans, an increasing number of companies have moved toward "buyouts" of participants' benefits, offering them cash lump sums instead of monthly benefits. They've also frozen defined benefit plans to close them to new employees or used a variety of other strategies to reduce their risk and financial obligations, such as offloading those obligations onto insurance companies by purchasing massive group annuities that will take over the payments.
That way companies can eliminate concerns over future expenditures necessary to meet monthly benefit payouts. That provides an added benefit: they no longer have to worry about returns on investments and interest rate changes and how such variables can affect what they will be obligated to contribute toward pension payments. It also saves companies money on their PBGC premiums, which are on the rise as well.
That's good news and bad news for the agency, and gives it pause. On the one hand, it will be exposed to less potential loss because of fewer participants in plans. However, on the other hand, should premiums dip too low, that could threaten the agency's ability to pay promised benefits on behalf of failed plans.
Requiring employers to report such offers will provide PBGC with the information it needs to plan to cover its own obligations.
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