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A New Way to Reduce Pension Risks?

Ford says it has a better idea as it looks to "de-risk" its pension funding by offering lump-sum buyouts to retirees. The impact on HR could be significant among large employers, if this becomes a trend.

Friday, May 18, 2012
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The Ford Motor Co., fresh on the heels of a major turnaround achieved over the past few years, is making change again. This time, the Dearborn, Mich.-based automotive giant is not announcing a new hybrid model or supply-chain strategy.

For its latest act, Ford is offering to make a one-time, voluntary lump-sum payment to nearly all of its salaried retirees by the end of 2013. It appears to be the first such program to specifically target retirees without being part of a broader plan termination, experts say.

According to those same experts, the impact on HR departments could be substantial, especially in areas of due diligence, communications and education, if this becomes a trend.  

Ford announced on April 27 that it will offer the option to about 90,000 eligible U.S. salaried retirees and salaried former employees. If someone chooses to receive the lump-sum payment -- instead of receiving periodic annuity payments -- the company's pension obligation to the individual will be settled.

According to Ford, payouts will start later this year and will be funded from existing pension-plan assets. The payment would be in addition to the lump-sum pension-payout option available to U.S. salaried future retirees as of July 1, 2012.

Michael Archer, leader of intellectual capital for the North American retirement practice of New York-based Towers Watson, the global professional services company, says that, historically, lump-sum distributions have been offered to participants only upon separation from active employment.

The Ford announcement, however, builds on a recent trend by plan sponsors to provide a one-time lump sum offer to former employees who have not yet commenced an annuity payment (so-called "terminated vested" participants).  

Archer, who says Towers Watson has a close working relationship with Ford on benefits matters, says the Ford plan represents a significant development in the U.S. defined-benefit-plan marketplace.

"There are many considerations, including potential regulatory issues, that plan sponsors contemplating a lump-sum offer will need to examine closely," Archer says. "We believe some plan sponsors will conclude that the current regulatory framework will support a properly designed offer."  

Archer adds that this development could have far-reaching implications for both plan sponsors and plan participants.

For plan sponsors, the ability to provide retirees a lump-sum offer provides greater flexibility in managing their retirement plans, including the ability to better manage the size of the plan relative to ongoing operations, as well as the ability to more efficiently administer the plan on an ongoing basis.

From a participant perspective, the decision to receive a lump-sum distribution, which is completely voluntary, provides them with greater flexibility to plan for retirement-income needs, including more control over the timing and how assets are invested.

"Each retiree will need to evaluate the trade-offs between greater investment control and the security of a guaranteed lifetime-income stream," Archer says.

Bob Shanks, Ford's executive vice president and chief financial officer, said in the statement that the move is part of the company's long-term strategy to "de-risk" its global funded pension plans. Driving the decision is Ford's strategy to continue improving the underlying strength of its balance sheet, he added.

"Providing the option of a lump-sum payment to current salaried U.S. retirees and former employees will reduce our pension obligations and balance sheet volatility," Shanks said.

Jon Waite, an expert on the management of corporate pension plans and chief actuary at SEI, a provider of outsourced fiduciary management investment services in Oaks, Pa., says it's not certain that Ford's strategy is the start of a larger trend. But from an HR perspective, it provides an option and strategy alternative to the inactive population.

"And another option is not a bad thing," he says.

On the other hand, he says, employers must consider the implications of dangling a lump sum in front of a retiree or terminated, vested participant. For HR, such an initiative requires a strong, thoughtful communications effort because taking a lump sum is not the typical line of thought for retirees.

"I don't know that it's a guaranteed positive for employers, either," he says, adding that, while there is a potential advantage in reducing long-term risk, it comes with challenges, including an accounting impact, such as potential added charges and reductions to a pension's funded status.

"Employers need to understand the impact; it's not something to jump into," he says. "You certainly have to look at the possibility ranges in terms of participation. Maybe nobody takes it or a substantial portion of those eligible take it."

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Byron Beebe, retirement leader for Lincolnshire, Ill.-based Aon Hewitt, says a number of companies have embarked on a process to lower pension liability by offering lump-sum payments to terminated vested participants. The Ford initiative is different in that it is offering the option to retired participants, too.

"As companies look to de-risk the balance sheet and make their pension liability smaller, this strategy can be a win-win, a worthwhile effort," he says. "But a lot of communication is necessary because retirees need help and advice now that that they have a choice."

Beebe calls the Ford plan a "huge undertaking," adding that employers should not underestimate the challenges of such a path. For example, even finding the terminated vested population may be difficult because of inaccurate addresses, etc.

"From an HR perspective, it means there would be a lot of work to be done," he says.

Also, answering retiree questions about the decisions they face can be a daunting task.

"For the participants, having the choice is a positive thing, but there is a segment of participants who really want someone to tell them what to do, but HR can't do that," he says. "But HR can help by connecting them with financial advisers."

Jonathan Gassman, a partner at Gassman & Golodny, a financial advisory in New York, says conversations between HR and those eligible participants -- and all employees -- should focus on education and the reasons they are offering this option.

"Most of all, tell the truth, be transparent and share the fact that for the employer's long-term viability, it is no longer possible to shoulder the full responsibility of maintaining a robust pension plan as existed in the past," he says, citing factors such as market conditions, tax-law changes, economic business models and more as key drivers in maintaining a competitive edge.

The main message for HR to communicate, Gassman says, is that the employer's focus is now on cost-cutting measures that will produce the best long-term impact for sustainability.

"At the same time, by offering the lump-sum package, HR can tell them they will have more control over the say in the way the funds are invested," he says.

Towers Watson's Archer says he would be surprised if some large employers do not follow Ford's lead in offering the lump-sum pension payments to current retirees.

"I am not sure if it will become a large-scale trend," he says. "If it's a success at Ford, some employers no doubt will follow Ford's lead."

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