Part 1: Pension Plans & ‘de-risking’

Corporations are transferring pension liabilities to third parties. Where does this leave retirees?

A new term has made its way into today’s financial jargon: de-risking. Anyone with assets in an old-school pension plan should know what it signifies.

De-risking is when a large employer hands over its established pension liabilities to a third party (typically, a major insurer). By doing this, the employer takes a sizable financial obligation off its hands. Companies that opt for de-risking usually ask pension plan participants if they want their pension money all at once rather than incrementally in an ongoing income stream.

The de-risking trend began in 2012. In that year, Ford Motor Co. and General Motors gave their retirees and ex-employees a new option: they could take their pensions as lump sums rather than periodic payments. Other corporations took notice of this and began offering their pension plan participants the same choice.

Three years later, the Department of the Treasury released guidance effectively prohibiting lump-sum offers to retirees already getting their pensions; lump-sum offers were still allowed for employees about to retire. In March, the Department of the Treasury issued a notice that permitted them.

So, whether you formerly worked or currently work for a company offering a pension plan, a lump-sum-versus-periodic-payments choice might be ahead for you.

This will not be an easy decision.

What is the case for rejecting a lump-sum offer? It can be expressed in three words: lifetime income stream. Do you really want to turn down scheduled pension payments that could go on for decades? You could certainly plan to create an income stream from the lump sum you receive, but if you’re already in line for one, you may not want the extra effort.

You could spend 20, 30 or even 40 years in retirement. An income stream intended to last as long as you do sounds pretty nice, right? If you are risk averse and healthy, turning down decades of consistent income may have little appeal – especially, if you are single or your spouse or partner has little in the way of assets.