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After Ford Motor Co. and General Motors Co. announced earlier this year that they would offer some retired and former employees a one-time opportunity to take lump-sum distributions, pension rights advocates were surprised at how quickly other large employers appeared to follow suit.
“It's an alarming and unexpected trend,” Karen Friedman, executive vice president and policy director at the Pension Rights Center in Washington, told BNA in an Oct. 24 interview.
The Pension Rights Center has been tracking lump-sum offers associated with what benefit consultants refer to as pension “de-risking.”
The current wave of de-risking transactions generally involves offers of lump-sum distributions or transfers of pension liabilities to an insurance company—or both.
Since the Ford and GM announcements in April and June, respectively, Verizon Communications Inc. and other corporate employers have made de-risking decisions. Verizon announced it would transfer a substantial portion of its pension liabilities to Prudential Insurance Co. of America by purchasing a group annuity contract from the insurer. Verizon did not offer a lump-sum option.
Friedman said the current wave of de-risking reminds her of the not-too-distant past when employers were terminating pension plans so they could use the excess assets for other business purposes or converting their traditional defined benefit plans into less-expensive cash balance plans.
De-risking initiatives reduce an employer's pension liabilities, administrative costs, and the effects of financial volatility that pension benefits create on the employer's operating budget. However, de-risking is not without its own risk and cost to employers, according to benefit consultants who advise employers on how to structure de-risking transactions.
Many de-risking initiatives target the benefits of former employees—namely, retirees who already are receiving monthly pension benefits and deferred vested participants who have earned pension benefits but are no longer working for the employer that is obligated to pay the benefits.
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