Employers looking to derisk by offering workers lump-sum buyouts could be depriving those employees of potentially greater benefits if they'd just stuck with the pensions they'd been earning in the first place. (Photo: Shutterstock)

It's not a hard and fast rule, but employees could be getting the short end of the stick if they take an employer-offered buyout instead of sticking with a pension.

A Forbes report points out that employers looking to derisk by offering workers lump-sum buyouts could be depriving those employees of potentially greater benefits if they'd just stuck with the pensions they'd been earning in the first place.

Regarding buyout offers, it says, "financial experts have warned repeatedly that this can be a poor decision for participants because the value of a pension goes beyond the dollar amount of the payments made over time. That's because the actuarially fair calculation the company is required to perform is not the same as what it costs to buy an annuity that protects you against outliving your assets."

While that's technically not "cheating" employees, it can entice some who would be better off with a lifetime benefit to accept a lump sum that they're not going to benefit from as much, or as long, as they would with a pension.

But now there's a new wrinkle, the report says. An example of it accompanies GE's recent pension freeze. The report explains that this new strategy offers employees "the option to begin their retirement benefits well in advance of the usual benefit commencement date."

GE had already closed its pension plan, according to a Reuters report, back in 2012, and its plans were underfunded by about $27 billion at the end of 2018. As part of its effort to cut its underfunding and reduce debt, GE froze its plans and offered lump sums to former workers; it also plans to prepay about $4.5 billion in contributions due in 2021 and 2022.

A Wharton report explains that GE took those drastic steps—freezing pensions of 20,000 workers with salaried benefits and supplementary pension benefits for about 700 executives, as well as offering buyouts to another 100,000 former employees who aren't yet drawing benefits—in its quest to cut its pension liabilities.

But because of the extent of its underfunding, says the report, if for some reason GE were to go into bankruptcy its pension plan would head to the Pension Benefit Guaranty Corporation, which already lacks sufficient funding itself to handle a liability of that size.

In addition, the report quotes Olivia S. Mitchell, Wharton professor of business economics and public policy, saying this about GE's assertion that the buyout payments will not increase its pension plan underfunding:

"What that suggests to me is that the lump sum buyouts will probably be less than the expected value of the lifetime income payments that the retirees would get if they accepted the long-term payments," Mitchell says, adding, "But how much less? We just don't know yet."

The Forbes report says that GE offered "two new options to eligible employees: in addition to retirement benefits payable at age 60 or 65, participants may elect a lump sum payable immediately or an 'early pension option' in which benefits would also start immediately. In this case, the individual was 53 years old and the monthly benefit offered for starting right away was only 45 percent of the monthly benefit at age 60."

The fine print, it continues, explained that "GE offers a pension with a 'normal retirement date' of 65, and the lump sum value and the early pension option monthly benefit were both based on the actuarial equivalents to the monthly age-65 benefit." But the plan also contained an option for an "early retirement subsidy" that would provide full benefits with no reduction, but wouldn't kick in unless/until the employee hit 60. Employees accepting the "early pension option" would lose out on this subsidy.

GE isn't the only company doing this, either. Forbes points out that UPS is also offering what it terms a "Special Pension Payment Offer," which gives an option for early pension benefits—also substantially smaller than what employees would get if they waited till retirement age.

While companies are providing explanations of the long-term consequences of such an option, it's not clear that employees really understand what they are giving up if they choose the early pension benefit—or how much that can amount to over the course of their lives.

As the report asks, "[C]ompanies are following the law. But are they acting ethically?"

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