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 If you work for a company with a pension plan, don’t be surprised if
you get an offer soon for a lump sum buyout - a deal where you
accept a pile of cash in exchange for the promise of lifetime income
when you retire.
The price tag for these offers is especially attractive right now,
from the plan sponsor’s perspective. But workers might do better by
holding out for a better deal, or by rejecting the buyout
altogether.
A growing number of plan sponsors are trying to get out of the
pension business, or lighten their obligations, by buying out
workers. The number of buyout offers has accelerated in recent
years, in part because of interest rate changes mandated by Congress
that reduce their cost to plan sponsors.
Now, revised projections for average American longevity are giving
plan sponsors new reasons to accelerate buyout offers. New Internal
Revenue Service actuarial tables that take effect in 2016 show
average lifespans up by about four years each for men, to an average
of 86.6 years, and women, to 88.8 years.
The new mortality tables will make lump sum offers 3 percent to 8
percent more expensive for sponsors, according to a recent analysis
by Wilshire Consulting, which advises pension plan sponsors. Another
implicit message here is that lump sum offers should be more
valuable to workers who take them after the new mortality tables
take effect.
Unfortunately, it’s not that simple.
“We’re definitely seeing an increase in lump sum offers from plan
sponsors,” says Jeff Leonard, managing director at Wilshire
Consulting, and one of the experts who prepared the analysis. “But
if it was one of my parents, I’m not sure if I’d encourage them to
take the offer now or wait."
The reason for his uncertainty is the future direction of interest
rates. If rates were to rise over the next couple years from today’s
historic low levels, that would reduce lump sum values enough to
offset increases generated by the new mortality tables. Leonard
estimates that a rate jump of just 50 basis points would eliminate
any gain pensioners might see from the new tables.
Deciding whether to accept a lump sum offer is highly personal. A
key factor is how healthy you think you are in relation to the rest
of the population. If you think you’ll beat the averages, a lifetime
of pension income will always beat the lump sum.
Another consideration is financial. Some people decide to take lump
sum deals when they have other guaranteed income streams, such as a
spouse’s pension or high Social Security benefits.
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The size of the proposed buyout matters, too. If you’ve only worked
for your employer a short time and the payout is small, it may be
convenient to take the buyout and consolidate it with your other
retirement assets.
Some people think they can do better by taking the lump sum and
investing the proceeds. It’s possible, but there are always the
risks of withdrawing too much, market setbacks or living far beyond
the actuarial averages, meaning you would need to stretch that nest
egg further.
And doing better on a risk-adjusted basis means you would have to
consistently beat the rate used to calculate the lump sum by
investing in nearly risk-free investments - certificates of deposit
and Treasuries - since the pension income stream you would receive
is guaranteed. Although the math here is complicated, it usually
doesn’t work out in a pensioner’s favor.
Could you wait for a better deal? Lump sum buyouts are
take-it-or-leave it propositions. But Leonard says workers who
decline an offer may get additional opportunities over the next few
years as plan sponsors keep working to reduce their pension
obligations. “Candidly, I think we’ll see a continued series of
windows of opportunity.”
For more from Mark Miller, see http://link.reuters.com/qyk97s
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Douglas Royalty)
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