Companies are free to tackle their hefty pension obligations through a controversial method involving one-time, lump-sum payouts to retirees and beneficiaries, the Treasury Department says.
That could help companies like General Electric Co., now struggling with a nearly $30 billion shortfall in its defined-benefit pension plan.
The notice issued Wednesday says that the agency doesn’t plan to follow through on a 2015 pledge, made during the Obama administration, to formally outlaw the method. In the wake of that pledge, many companies had stopped offering retirees a one-time lump sum payment, and stuck instead to traditional monthly “annuity” payments.
The Treasury notice was largely a surprise, said Kevin O’Brien, a benefits and compensation lawyer at Ivins, Phillips & Barker. “Without question, yes, companies will do lump sum payments.” He called the notice “a very big deal.”
One-time payouts can reduce the “drag” that pension obligations have on a company’s balance sheet, as well as get rid of the extra premiums companies must pay to the government’s Pension Benefit Guaranty Corporation if they’re underfunded — meaning that they don’t have enough money to pay current and future retirees.
Data compiled by Bloomberg found that in 2017, 186 of the 200 biggest defined-benefit plans in the S&P 500 based on assets weren’t fully funded to the tune of $382 billion.
The Obama administration opposed lump sum payments over concerns that some retirees might immediately spend their sudden windfall and have nothing left for the future.
Still, it had allowed lump sum payouts to workers who were eligible for payouts but hadn’t yet reached a company’s set retirement age, and many companies took advantage of that, O’Brien said.
Because defined benefit plans are generally more expensive to operate, companies have sought to scale them back in favor of defined contribution plans like 401(k)s.
“It was a policy decision,” O’Brien said of the Obama-era restriction, adding that “the Trump administration has undone that.” He said that the Treasury notice will allow companies to tend to “the care of their dying pension plans.”
Copyright 2019 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.