By Jerry Geisel, Crain News Service
CHICAGO (June 27, 2013) — A sizeable majority of top corporate financial executives are considering a pension plan de-risking approach by offering plan participants the option to convert their monthly annuity to a cash lump-sum benefit, according to a new survey.
Sixty-seven percent of senior financial executives surveyed by CFO Research Services—a unit of CFO Acquisitions L.L.C.—in conjunction with consultant Mercer L.L.C. said it is "very likely" or "somewhat likely" they will offer former employees not yet retired the opportunity to convert their future annuity to a lump-sum benefit.
In addition, 56 percent of respondents said they are very likely or somewhat likely to make an annuity to lump-sum benefit offer to current retirees.
Reducing number of participants
Such an approach has drawn increased interest from employers as they look to reduce risks and costs associated with sponsoring defined benefit plans. To the extent that employers are able to reduce the number of participants in their pension plans, risk factors such as fluctuating interest rates used to value plan liabilities and investment returns on plan assets become less important.
In addition, by reducing the number of plan participants through annuity-to-lump-sum benefit conversions, the overhead—such as premiums paid to the federal Pension Benefit Guaranty Corp.—that comes with offering a pension plan is reduced.
Corporate executives interviewed for the survey, which was released June 25, said a significant percentage of plan participants accept such conversion offers.
When Red Wing Shoe Co. Inc. last year offered terminated vested employees in one of its pension plans the opportunity to convert their annuities to a lump-sum benefit, about 60 percent accepted.
Red Wing now intends to make such an offer to terminated vested employees in two other plans it sponsors. "If we get a 50 percent response on our next two offerings, we would be very happy with one of the phases of our de-risking efforts," Ralph Balestriere, Red Wing executive vice president and chief financial officer, said in the report.
In addition, trail-blazing moves by General Motors Co. and Verizon Communications Inc. in which the two companies transferred billions of dollars in pension plan liabilities to Prudential Insurance Co. of America through the purchase of giant group annuities, has triggered the interest of other employers in doing the same.
In fact, 45 percent of respondents said pension risk transfers such as GM's and Verizon's have made that approach somewhat or much more likely for their organizations.
The survey is based on the responses of 177 corporate financial executives.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.