Do you know how much keeping former employees in your defined
benefit plan costs? Mercer's US Pension Buyout Index for
November 2013 reports that as of December 31, 2013, the economic
cost of retaining retiree liabilities exceeded the buyout cost.
An important factor is that, last year, Congress increased the
annual base premium payable for each Pension Benefit Guaranty
Corporation (PBGC) insured defined benefit plan participant from
$50 to $57 for 2015 and to $64 in 2016. This will make the cost of
retaining terminated participants in U.S. defined benefit plans
more expensive relative to providing them with lump sum payouts or
fully paid up annuity contracts, actions which remove them from the
balance sheet and the PBGC insurance program. And recent
improvements in plan funding levels from the stock market boom and
interest rate increases have made more plans eligible to consider
de-risking payouts, since lump sum payments and annuity purchases
are restricted for plans that are less than 80% funded under IRS
De-risking in this manner won't be the choice for all plan
sponsors, but they are paying more attention than ever to their
options. On January 29, 2014, Aon Hewitt reported that its survey of more than
220 U.S. companies showed that 12% of plan sponsors recently
introduced or expanded the availability of lump sum options for
former employees, and 43% are likely or somewhat likely to
introduce a lump sum window for former employees during 2014.
Sponsors may also consider annuitizing groups of participants as
steps towards complete termination, or as they retire. And those
who are not ready to move forward on de-risking payouts can better
match their plan's investments to liabilities as funding
improves, something Aon Hewitt reports is under consideration by
62% of sponsors.
There are legal and accounting issues to add to the decision
tree as well. For example, the law is not clear whether lump sum
options may be offered to retirees already getting monthly
pensions, although the IRS in non-binding authority permitted some
sponsors to do so. The Department of Labor's advisory council
recently considered whether new rules governing de-risking would be
appropriate to consider. Some actions will trigger accounting gains
And there may be U.S. litigation risk as well, despite the fact
that paying lump sums and buying annuities for U.S. retirees are
long-standing pension practices. The Verizon litigation I have been tracking on
this blog for some time refuses to die. Verizon retirees tried
unsuccessfully to block Verizon's annuitization of their
pensions through Prudential, arguing that it violated numerous
provisions of pension law and improperly removed them from the PBGC
insurance program. Plaintiffs were allowed to file a new amended
complaint. Oral argument on Verizon's motion to dismiss this
complaint will be held soon.
It is too early to tell whether we will have major U.S. buyouts
in 2014, but not too early for plan sponsors to put themselves in a
position to make informed decisions about de-risking by monitoring
their plan's investments and funding options and keeping
abreast of legal developments.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Unfortunately, reasonable accommodation for employees in the workplace continues to be the source of significant litigation and even today we continue to see outrageous examples of employers behaving badly.
We are now beginning to see reported cases involving charges and subsequent fines laid against employers for failing to provide information, instruction and supervision to protect a worker from workplace violence.
On October 13, 2016, the Supreme Court of Canada denied leave to appeal an Ontario Court of Appeal decision which ordered an employer to pay a former employee 37 months of salary and benefits following termination.
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