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Pension buyouts: What your client needs to know

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Last year, two major corporations – GM and Verizon – announced plans to shift their pension liabilities to annuities administered by Prudential. The moves garnered national headlines and some measure of controversy. Verizon retirees filed a lawsuit in an attempt to halt the transfer.

However, GM and Verizon are far from the only corporations that have sought to lessen the financial strain of defined benefit (DB) or pension plans on their balance sheets. According to a 2012 report, “Unlocking Shareholder Value Through Pension Risk Transfers,” by management consulting firm Oliver Wyman, overall single employer-sponsored corporate DB pension plan liabilities total roughly $2 trillion on a U.S. GAAP basis.

Oliver Wyman’s sister company, Mercer, recently launched a U.S. Pension Buyout Index, to help plan sponsors evaluate how much it would cost to have an insurer take over their retiree liabilities in a DB plan. It estimates that of domestic plan sponsors that have a DB plan, 60 percent have either closed or frozen their plans. Therefore, “many sponsors are thinking carefully about what their eventual ‘endgame’ will look like for their plan(s),” speculates the Oliver Wyman report.

But what is the endgame for the retiree who is offered the choice of the buyout or staying with the pension? That’s a dilemma an increasing number of financial planners may have to answer for clients in the future.

One advisor, Jill Pollard, pictured, founder and president of Tailored Financial Services in Lupton, Mich., has been dealing with that question probably more than most in her profession of late. She’s located about two hours north of Detroit and estimates about half of her clients and prospects work or have worked in the auto industry. In the spring, she launched a website,, to dispense information a retiree should consider when offered a pension buyout. Though she doesn’t have an estimate of how many have visited the site, Pollard says she has booked about a dozen meetings with prospects who have visited the website.

Major life decision

For many, it’s a major life decision and one they never thought they would have to make. After all, having a pension was supposed to take care of a worker’s retirement finances. Now, they are not so sure.

“When people get this huge pension buyout check, they have no idea what to do with it,” Pollard says. “Should they take it? Shouldn’t they take it? It’s a big decision for them.”

Some clients wonder why the company is making this offer now. Does it mean the company will soon be shuttered? If they put their money with another company, is that company reputable? “It’s turned their whole world upside down because now they have to think about possibly going back to work again. It’s kind of scary for them,” Pollard says.

The primary factor in making the decision is how much of a guaranteed income stream they will get if they take the buyout. For some, it makes sense to stay with the pension and not make the switch. “If they are getting $1,000 a month from the pension and if they move it somewhere else, they get $800, that’s not a good deal for them,” Pollard says.

Another consideration is whether their spouse or heirs will continue to get the payout if the retiree dies. Depending upon the plan, the payments may not continue to the spouse, Pollard notes.

On the flip side, going with the insurer could mean extra benefits not available with the pension, like home health care, and the ability to leave a legacy to their heirs. For those reasons, the majority of clients are taking the buyout offer, Pollard says.

For advisors who counsel clients on whether to take a buyout offer or not, the main consideration should be to ensure any decision works in the client’s best interest, says Pollard. “The financial advisor needs to run the numbers from top to bottom to make sure it works for the client, to make sure wherever they are placing the money it’s going to be somewhere where it’s safe and that the employee can live on it.”

For if there is one thing Pollard is sure about, it’s that more companies will take the pension buyout route and advisors will be faced with these questions to a greater extent in the future. “I know of a couple of large companies in the area that are going to offer it probably within the next six months,” Pollard says. “It’s a huge liability for a company and they can’t continue to fund the pensions so it’s best for the company to get it off their books. That’s why they’re offering these pension buyouts. I think it’s going to be common.”

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