Over the past several years, many plan sponsors have implemented a “de-risking” strategy that allowed them to offer lump sums, equal to the value of future annuity payments, during a temporary “window” period to former employees, including retirees in pay status. While this strategy was particularly popular with the terminated vested population who had not yet begun their annuity payments, it was also permissible to offer it to retirees who were currently receiving an annuity. The advantages of such a window included lowering PBGC premiums and shrinking plan liability, thereby reducing future risk and volatility.

On July 9, 2015, the IRS reversed its position – effective for any amendments after that date – and will no longer allow the acceleration of annuity payments through a lump sum distribution to participants in pay status who have attained age 70 ½ – the age at which plan benefits are required to commence under the minimum distribution regulations. Any amendment to provide a temporary window for lump sums after that date will have to limit it to participants who have not yet commenced benefits.

Other options still exist for de-risking pension plans, including liability-driven investing and annuitizing accrued benefits through an insurance company, and should be carefully considered in the greater context of an organization’s risk management strategy. For more information or to discuss appropriate strategies for your organization, please contact Harper Danesh.