Last June, GM offered 44,000 retirees the option of converting their on-going pension benefits into a lump sum payment.  Yesterday, GM announced in a filing with the SEC that 30 percent of its retirees accepted the lump-sum offer.  As we previously discussed in this blog, GM’s offer was made in the context of a larger pension settlement transaction.  GM’s lump-sum offer was limited to individuals who retired on or after October 1, 1997 and before December 1, 2011.  Responsibility for the pensions of individuals who retired earlier, as well as those who declined the lump sum offer, are being transferred to Prudential in connection with a termination of the GM pension plan. 

The lump-sum take-rate among GM retirees may be significantly lower than the take-rate among individuals who have not yet begun to receive their pensions.  In one study several years ago, Vanguard observed that more than two-thirds of pension plan participants elected a lump sum when it was offered.  In that study, even participants age 70 and older were at least 50 percent likely to take a lump sum.  That study was performed before the financial crisis, however, and lump-sum take-rates may generally be lower today. 

De-risking through pension settlements is becoming more attractive.  Many sponsors of defined benefit plans, especially frozen plans, are considering ways to “de-risk” by reducing or eliminating the volatility associated with their pension obligations for financial accounting and pension funding purposes.  GM’s transaction followed an earlier lump sum offer by Ford.  Most recently, Verizon announced a $7.5 billion pension settlement, which involves transferring liabilities to an insurance company without offering lump sums.

Photo of Robert Newman Robert Newman

Robert Newman represents clients ranging from small employers to some of the nation’s largest employers, including for-profit and tax-exempt entities.  His practice includes designing, drafting, and amending a wide range of retirement plans (including 401(k) plans, ESOPs, and traditional and hybrid defined benefit…

Robert Newman represents clients ranging from small employers to some of the nation’s largest employers, including for-profit and tax-exempt entities.  His practice includes designing, drafting, and amending a wide range of retirement plans (including 401(k) plans, ESOPs, and traditional and hybrid defined benefit plans) and welfare plans (including health, severance, and cafeteria plans); creating executive compensation arrangements including nonqualified deferred compensation plans, stock option plans, and other incentive plans; representing clients before the IRS and the Department of Labor; assisting clients with legislative initiatives; providing benefits expertise in corporate transactions and ERISA litigation; counseling clients with respect to pension fund investments in private equity funds and hedge funds; and negotiating and writing employment agreements.