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A New Way to Reduce Pension Risks?

Saturday, June 16, 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 relation- ship with Ford on benefits issues, says the Ford plan is 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."

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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.

For participants, 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 CFO, said in the statement that the move is part of the company's long-term strategy to "de-risk" its global pension plans.

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