In the past few years, several large pension plan sponsors have sought to decrease the risk associated with their pension plans by purchasing group annuities to cover future payments or by offering a lump sum window during which eligible participants were permitted to elect a cash lump sum buyout. Many other plan sponsors are considering following suit. This trend has been accelerating in response to higher PBGC premiums, lower interests rates and updated mortality tables reflecting increased longevity.

The PBGC has an interest in tracking this activity because the decrease in the number of participants reduces the per-participant premiums collected by the PBGC making it more difficult for it to fulfill its role in protecting pension benefits. As a result, beginning with the PBGC premium filings for 2015, due for most plans on October 15th, the PBGC has added a new requirement that plan sponsors provide data regarding risk transfer activities.

The instructions for the 2015 PBGC filing require plan sponsors to report group annuities purchased and lump sum windows offered in 2014 and 2015. However, a plan sponsor can disregard annuities and lump sum windows offered under certain routine circumstances as well as annuities purchased and lump sum windows closed less than 60 days before the filing.

The information that must be filed includes the following:

  • Annuities – Plan sponsors must report (1) the number of persons in pay status for whom an annuity was purchased, and (2) the number of persons not in pay status for whom an annuity was purchased.
  • Lump sum windows – Plan sponsors must disclose separately for those in pay status and those not in pay status (1) the number of persons who were eligible for the window, and (2) the number who actually made the lump-sum election.

Reasonable estimates may be used for the 2015 filing but more exact counts may be required in future years. Plan sponsors should gather this data for the 2015 filing and also take steps to track this data for any future de-risking activities.

Plan sponsors should also be aware that concerns have been raised about the need for regulation in this area to protect participants by requiring adequate disclosures. For example, participants should consider: (1) whether they want the responsibility of investing the money on their own, (2) the potential challenge of generating a comparable income stream in the retail market, and (3) the fact that they could be leaving a potential early retirement subsidy on the table if their employer offered one in the future. On the other hand, it may be appropriate for some participants to accept the offer depending on their personal circumstances. Despite these concerns, no applicable guidance has been published to date. That said, plan sponsors should consider these issues carefully in designing an offer and also be sure to make adequate disclosures.