Pension buyouts on the rise

The mechanics

There are two primary buyout trends in the industry, Esenwine says. In one model, the plan offers a lump sum cash-out to its deferred vested employee population. The other model, which Prudential uses, uses group annuity contracts to fund the benefits.

At the risk of oversimplifying the process, in a traditional buyout the employer transfers its fully funded pension plan, i.e., assets and liabilities, to the insurer. With Prudential, for instance, the insurer's general account subsequently guarantees benefits and makes payments directly to the participants.

In a protected portfolio buyout, Prudential places the assets in an account separate from the general account for an added level of protection. Both methods allow the employer to walk away from the pension plan's administration and expense.

What now?

So what should your client do? She really can't do anything until the plan provides more specific details on the transfer options: lump sum, annuity or a choice between them. From a pension income perspective, nothing will change before the transfer.

If the client is offered and opts for a lump sum option, then you need to review the pros and cons of lump sums versus annuities as they apply to the client's situation. I discussed this topic in a previous blog post.

If she decides to, or must continue with an annuity from the insurer, the form and amount of her pension will remain the same. That raises another key consideration, though: the loss of PBGC insurance. I won't debate the value of that coverage — the writers at BenefitsPro.com do an excellent job covering the agency and its finances. The National Organization of Life & Health Insurance Guaranty Associations provides details on state guarantee funds. At a minimum, you can review applicable state-level coverage and the insurance company's financial strength and share that information with the client.