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Pension Risk Transfers and Annuity Payout Trends

By Mark Johnson, Ph.D., J.D.

Mark Johnson, Ph.D., J.D.


817-909-0778
mark@erisa-benefits.com

Consulting services in:


Fiduciary liability
401(k) and ESOPs
Pension benefits
Bankruptcy
Cash balance conversions
Group life & health plans
Health plan reimbursement
Long term disability benefits
Retiree medical plans
Severance benefits
Survivor benefits
Third party administrators
VEBA plans

Lump sum payouts by U.S. corporate pension plans are


gaining in popularity, resulting in a slight drop in the amount
of total assets held by the worlds largest pension funds.
According to a recent study published by Willis Towers
Watson and Pensions & Investments, the worlds top 300
pension funds saw a three percent decline in 2015 total assets,
compared to growth of 3 percent in 2014. The U.S. is the
leading country in terms of pension fund assets, with 38
percent of total assets. Japan is second with 12 percent.
Despite the recent year-over-year decline, U.S. pension assets
have actually grown over the past five years from $4.9 trillion
in 2010 to $6.5 trillion in 2015, reports Willis Towers Watson.
Pension fund managers continue to use pension risk transfer
techniques to remove pension liabilities from their balance
sheets by offering plan participants the chance to take a lump
sum payment or an annuity.
More than half (56 percent) of U.S. companies surveyed by
management consulting firm Aon Hewitt reportedly offered
former employees the opportunity to take a lump sum payout
in 2016. This represents a significant increase from 44 percent
offering such plans in 2015 and 12 percent in 2014.

Recent premium increases by the Pension Benefit Guaranty Corp. (PBGC) may be one reason
behind the push for pension risk transfers. The PBGC premium per participant is $64 in 2016,
compared to $35 in 2012. Low interest rates are another factor in risk reduction trends, along
with increased mortality.

ERISA Benefits Consulting, Inc.

www.erisa-benefits.com

817-909-0778

WestRock, a U.S. packaging company formed in 2015 following the merger of MeadWestvaco
and RockTenn, recently completed a $2.5 billion purchase of a group annuity contract from The
Prudential Insurance Company of America. Assets from the WestRock Company Consolidated
Pension Plan were used to transfer payment responsibility for retirement benefits owed to
approximately 35,000 U.S. retirees and their beneficiaries. The transaction is expected to reduce
WestRock pension obligations in the U.S. by 40 percent.
In a separate action also intended to encourage plan participants to consider annuity options, the
IRS and Treasury Department last month issued final regulations titled, Modifications to
Minimum Present Value Requirements for Partial Annuity Distribution Options Under Defined
Benefit Pension Plans.
The IRS rules relate to defined benefit plan distributions. The permit plans to simplify the
treatment of certain optional forms of benefit that are paid partly in the form of an annuity and
partly in a single sum or other more accelerated form. Plan participants, beneficiaries, sponsors,
and administrators of private sector, defined benefit pension plans are all affected by the IRS
regulations.
In the past, defined benefit plan participants were asked to choose between either a lump sum
payment or an annuity for lifetime income. Under the new IRS rules, retirees will be given the
choice to combine an annuity with a lump sum payout.
The ability to bifurcate defined benefits into both a single payout and an annuity does not
impose any requirements on either the plan sponsor or the participant. Rather, it is intended to
simplify the payout process.
Plan years beginning on or after on or after January 1, 2017 are subject to the IRS rules regarding
annuity distributions. A plan participant can also elect to apply the rules to an earlier period.
October 2016
ABOUT THE AUTHOR. Mark Johnson, Ph.D., J.D., is a highly-experienced ERISA expert. As a
former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has
practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He
works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree
medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in
bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-9090778 or www.erisa-benefits.com.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and
does not engage in the practice of law.

ERISA Benefits Consulting, Inc.

www.erisa-benefits.com

817-909-0778