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Should You Accept a Pension Buyout Offer?


Corporate pension buyout offers have been in the news lately with Hartford Financial Services offering lump-sum payment options to former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group.

Other major corporations have made similar offers in recent years including General Motors, who actually offered retired employees a “pension do-over.”

The answer to the question of whether you should accept a pension buyout offer is that it depends upon your situation.  Here are a few things to consider.

Are they sweetening the deal? 

I don’t know the details of either the Hartford or the Boeing offers but I have to think they are offering these former employees some sort of incentive to forgo their normal pension and to take the buyout offer.  Perhaps the lump-sum is a bit larger and in the case of the Boeing offer the annuity payments are a bit better.  Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities.  The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision.  A key question to ask yourself is whether you are equipped to manage a lump-sum payment.  Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement.  Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover.  In some cases these advisors have moved this rollover money into investments that are wholly inappropriate for these investors.  As always be smart with you money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension?  This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing.  In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC.  If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue.  However if you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments.  Typically if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company.  They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG.  Typically if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department.  The rules as to how much of an annuity payment is covered will vary.

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases.  This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum.  Take a look at all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option.  As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you.  I suspect that pension buyout offers will continue to be offered by more and more organizations seeking to reduce their pension liability.  You need to be prepared to deal with an offer if you receive one.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

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  1. The traditional pension can be great, nothing like a guaranteed fixed check each month, for that ‘third leg of the retirement stool’.
    But when offered a buyout over a decade ago, my wife and I both took it. A few simple reasons.

    1 – Once started, the pension would be distributed each month. No taking more or less to help manage the year’s tax bracket.
    2 – While the monthly number at retirement seemed great, that money stopped on death of the owner. Want a joint benefit? That monthly check would be 25% less. Both die in a car wreck? Nothing left to the kid(s).
    3 – The numbers used were very conservative. In other words, the lump sum we took will produce more income at retirement age than the plan would have given us even if the plan stayed in effect. Soon after the buyout offer, the plans were killed. We had our money, but those that stayed in the plan had their benefit frozen at the level at the time the plan stopped. Those just 10 years from retiring got a projection that was half or less than had the plan lasted 10 more years.
    4 – Aside from the flexibility of withdrawals, now that the funds are in our IRAs, we have the option to convert to Roth, a bit at a time, if we wish.

    At the time we needed to make the decision, I sat with a number of coworkers and offered my very biased opinion. They all stayed with the plan, and only after the fact, a year later when the plan was canceled and the final pension projections came to them, did they realize what a mistake they made.

    • Roger Wohlner says:

      Joe thanks for your comment hope you are doing well. I would expect no less of an analytical process from you LOL. As I’m sure that you would agree everyone’s situation is different as are the quality of the pension options offered. I often suggest a lump-sum for many of the reasons that you mentioned but I’ve also seen some annuity payment options that are a good deal. Much depends on the other retirement assets that a person has and other circumstances.


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