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AARP The Magazine

The Great Pension Sell-Off

Should you take a lump sum or an insurer's annuity?

money report pensions sell companies risk safe security emerging

Is your retirement pension plan going up in flames? Make sure your benefit payments best fit your needs. — C.J. Burton/Corbis

En español | Carl Monheit's former employer reliably mailed his monthly pension check to him for 17 years. A year and a half ago things changed.

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The Hackensack, New Jersey, resident, along with thousands of other retired managers, learned he would no longer be part of Verizon's pension plan. Instead, the telecommunications giant bought them an annuity. While payments would stay the same, future checks would now come from an insurance company.

"It was kind of a shock," says Monheit, 67, who retired after 30 years from a company that became what is now Verizon. "Why are they changing things that worked for so many and worked well, and provided so much comfort and security to people who built their business?"

It's a question more retirees and older workers likely will be asking as U.S. companies move to get expensive pension obligations off their books. Companies call this new approach "de-risking." Some firms purchase annuities for their pensioners, while others offer cash to buy them out. And some — most notably General Motors in 2012 — try a combination: first offering a lump sum and then buying an annuity for those who don't take the money.

money report pensions sell companies risk safe security emerging

Click infographic to view larger image.

A report by benefits consultant Towers Watson last year found that 58 percent of companies surveyed had offered lump sums to former employees or plan to do so, while 38 percent expect to transfer pension obligations to an outside company within the next five years.

Lynn Dudley, senior vice president at the American Benefits Council, which advocates for businesses, says pensions are difficult to maintain because of frequent regulatory changes and the rising premiums that employers pay to the Pension Benefit Guaranty Corp. (PBGC) to insure their plans. "The environment has gotten hostile," says Dudley."What companies are trying to do is reduce their exposure to risk, from things like market volatility and changes in the law," says Deborah Chalfie, senior legislative representative for AARP. "It's not really de-risking. It's transferring the risk."

This transfer began in earnest in 2012 when changes to pension law fully kicked in, making it more attractive for employers to offer lump sums, she says. A rash of companies made cash offers that year, including Ford Motor Co., J.C. Penney, Lockheed Martin Corp. and Archer-Daniels-Midland Corp.

Rob Austin, director of retirement research at benefits consultant Aon Hewitt, says the jump in PBGC premiums, along with proposed new mortality tables that raise life expectancies, will further encourage employers to reduce their pension exposure.

Retiree advocates are concerned. Traditional pensions have been disappearing for years in the private sector, where only 16 percent of workers were covered last year, down from 35 percent in the early 1990s, according to the Bureau of Labor Statistics. This latest trend, though, leaves retirees without valuable federal protections and increases their chance of outliving their money, particularly if they take a lump sum and don't invest wisely.

"We call it 'pension stripping,' " says C. William Jones, president of the Association of BellTel Retirees Inc. in Cold Spring Harbor, New York. Jones, 75, is among the 41,000 retired managers affected by the Verizon switch. Some of them are suing Verizon over the change. He receives the same monthly payment as always. "The difference is, we have lost certain protections," he explains.

Benefits, for instance, are no longer guaranteed by the PBGC — a key safety net. This federal agency insures private pensions in case an employer goes bankrupt, guaranteeing a maximum annual benefit of $59,318 for a 65-year-old retiree this year.

Next page: Annuities and lump sum positives and pitfalls. »

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