Terminated Vested Cashouts

Mercer Insights

Terminated Vested Cashouts - Overcoming Common Misconceptions


In the past few years, a growing number of defined benefit pension plans have been opting to transfer risk from the balance sheet through lump sum cashout windows and annuity purchases from insurers. While a few high-profile retiree annuity purchase transactions were made in 2012, the most common form of risk transfer to date has been lump sum cashout windows for terminated vested participants.

The advantages to the plan sponsor of a lump sum cashout can be numerous, and the economics of such an exercise are often very compelling. Furthermore, increases in interest rate levels and improvements in funded status during 2013 may make 2014 an opportune time to capitalize on these advantages.

Benefits to the plan sponsor of offering a terminated vested cashout window include:

  • Reduced pension liability, leading to lower plan risk and volatility
  • Eliminated PBCG premiums for participants electing a lump sum (PBGC per-participants are scheduled to increase from $35 per participant in 2012 to $64 by 2016 and continue to increase thereafter).
  • Eliminated ongoing administrative costs for participants electing a lump sum.
  • Reduced investment management costs for the funds used to cashout.
  • Ability to make lump sum payments before updated statutory mortality tables increase costs (recently released mortality tables by the Society of Actuaries could increase terminated vested liabilities by 5%-10% or more).
  • Potential interest rate arbitrage in 2014, depending on the relationship between lump sum rates and market-based rates.



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