Corporate America Seeks to Reduce Pension Liabilities


Equifax and NCR have reportedly joined a growing number of large U.S. corporations that are offering employees lump sum payouts in lieu of their guaranteed, lifetime monthly pension payments. Other notable companies offering pension buyouts include General Motors, Ford, Sears, Archer Daniels Midland, automotive industry supplier Visteon, and the New York Times Co.

Equifax’s proposed buyout was made to 3,500 former vested employees. Equifax is also offering, as an alternative to the lump sum, a reduced annuity that would start paying this December 1st, regardless of the participant’s age. The Equifax offerees have until November 16 to either accept one of the two offers, or to keep their current pension benefits. NCR made its buyout offer to 23,000 former employees, who have until October 31 to make a decision.

Equifax’s pension plan was reported to be underfunded by $163.1 million, according to an Atlanta Journal-Constitution article entitled “Companies look to shed liabilities,” by J. Scott Trubey, which cites a 2011 regulatory filing. NCR’s U.S. pension benefits were underfunded by $1.3 billion, according to the article, citing NCR’s 2011 annual report.

Experts say that the question for employees is whether the flexibility of receiving a lump sum outweighs the risk of outliving or having that lump sum mismanaged. The only certainty about such buyout offers is that the companies believe they will benefit if employees accept them.

There are circumstances in which it may be advantageous for an employee to accept a lump sum buyout ? for example, if the employee has six months to live. But generally speaking, employees should, as a starting point, ask: If employers believe a buyout will reduce their payments over time, how is that good for employees?

J. Boyd Page of Page Perry, an investors’ law firm in Atlanta urges employees to be cautious when evaluating these offers and even more cautious if they decide to take the lump sum. “In our practice, we have seen many cases where unscrupulous financial advisers have preyed on employees who accepted lump sum payments. Unfortunately, all too often, the employees find that their retirement that was once so promising is left in shambles.”

Corporate America has been moving away from traditional defined benefit pensions plans toward defined contribution plans (401(k)s, etc.) for 30 years. It is essentially a risk-shifting strategy on their part. If employees accept the buyout, the risk of not having sufficient funds to make future payments is shifted away from the employer and onto the employee.

In 2010, among private sector employees, only 3% were participants in a defined benefit pension plan, down from 28% in 1979, according to the article, citing the Employee Benefit Research Institute. During the same period, 31% of private sector employees participated in a defined contribution [401(k)-type] plan, up from 7 percent in 1979. Eleven percent of private sector employees were participants in both pension and 401(k)-type plans in 2010.

Public sector employees are far more likely to have a defined benefit pension plan than private sector employees. Many state and local government pensions are underfunded. So are many private sector pension plans.

Americans are living longer. Some companies and governments based their plan funding on assumptions about investment returns that did not pan out. The actual returns over the past 15 years, including the collapse of the bubble and the financial crisis of 2008 and 2009, decimated many pension plan investment holdings.

Pension plan participants should be very cautious in making their decision on whether to surrender their annuity for a lump sum or reduced annuity. They would be well-advised to seek the assistance of a trustworthy, independent professional in evaluating their options.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.