Do you have questions on how to manage your pension risk? Watch how a CFO “Buys In” to a pension strategy from Pacific Life.
Recent market volatility has convinced many defined-benefit plan sponsors that they need to reduce the risks inherent in their plans, and do it soon. Yet, some solutions they might consider, such as terminating the plan, cannot be completed immediately or could have adverse effects on their income statement.
If that’s your situation, consider a buy-in annuity contract. A buy-in annuity is a versatile tool that can be used in a variety of situations, including:
Removing risk prior to plan termination – If you’re not yet ready to terminate your plan, a buy-in annuity can lock down plan costs now, giving you time to file the necessary termination and regulatory paperwork with the IRS and Pension Benefit Guaranty Corporation (PBGC).
Delaying recognition of settlement accounting – With a buy-in annuity, you can de-risk your plan without the need to recognize the pension losses on your balance sheet until later when you terminate the plan.
Facilitating a merger or acquisition – Because a buy-in annuity locks down plan costs, companies negotiating a merger or acquisition can guarantee what those costs will be after the merger/acquisition is complete.
Financially securing nonqualified SERP benefits – A buy-in annuity can guarantee monthly payments under a Supplemental Executive Retirement Plan (SERP).
To provide more insight on how a buy-in annuity can help achieve goals like these, let’s look at some actual clients who have used Pacific Life’s Pacific Secured Buy-In annuity in the recent past.
The CFO of a not-for-profit organization had been spending significant time dealing with his pension plan’s volatility for more than a decade, taking his focus off other projects that needed his attention. This included ensuring the plan was well-funded and managing the expectations of several stakeholders, including an ever-changing board of directors. He decided to terminate the plan. However, he also recognized that the organization would be subject to significant financial risk during the termination process.
He decided to purchase a Pacific Life Secured Buy-In annuity, which transferred risk to Pacific Life. As a result, Pacific Life began guaranteed monthly payments to the plan trust to cover its liability cash-flow needs. This gave the CFO significant time back and the flexibility to proceed with plan-termination filings. A year later, when the organization was ready to terminate the plan, no additional premium was required to convert the buy-in contract to a buy-out, resulting in a full transfer of all plan liabilities to Pacific Life.
A hospital that had frozen benefit accruals for all pension-plan participants decided to make significant cash contributions to the plan to fund its future liability. The plan administrators considered de-risking the plan by terminating it and purchasing a buy-out annuity, but did not want to recognize settlement losses in the current year.
Instead, the hospital decided on a Pacific Secured Buy-In annuity. This provided the financial guarantees they wanted along with the flexibility to determine when the plan would be fully terminated. Nearly eight months later, the hospital distributed the plan’s assets to plan participants, recognized the settlement loss in the new tax year, and successfully terminated the plan—all at their own chosen pace.
The CEO and CFO of a midsize manufacturing company received an appealing offer by a larger suitor to buy their company. However, the acquiring company didn’t offer a defined-benefit pension plan and didn’t want to take on the volatility risk inherent in such a plan.
The CEO and CFO knew the merger couldn’t be completed until its pension liability was locked down to the satisfaction of the acquiring company. They also knew it had to be done soon, or the merger could easily be derailed. Their solution was to purchase a Pacific Secured Buy-In annuity that would sufficiently transfer risk to Pacific Life. The merger is now expected to be completed in 2019.
A brand-name manufacturing company had closed both its qualified defined-benefit plan and nonqualified SERP to new participants. The company’s CFO knew that the executives enrolled in the SERP were counting on it for most of their retirement income. However, the liability associated with the plan was significant, especially considering the impact of changing interest rates and the fact that executives were living longer than expected.
To ensure that financial promises made to the executives could be kept, the CFO decided to purchase a Pacific Secured Buy-In annuity and have monthly payments from Pacific Life made to a rabbi trust. The payments would equal the after-tax cash flow needs of the trust, and the trust would pay the executives. Not only did this guarantee that financial promises would be kept, it also helped avoid the potential for constructive receipt that would occur if the insurance company paid the executives directly.
If you are seeking an effective solution for the various risks created by your qualified and nonqualified pension plans, consider a buy-in annuity, such as Pacific Secured Buy-In. It can help free up time for you to focus on more important company issues, take control of your plan, and reduce risk while you decide on when to complete the conversion to a buy-out annuity and/or terminate your plan.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products. Pacific Life, its affiliates, its distributors, and respective representatives do not provide any employer-sponsored qualified plan administrative services or impartial advice about investments and do not act in a fiduciary capacity for any plan.
Pacific Life Insurance Company (Newport Beach, CA) is licensed to issue insurance products in all states except New York. Product availability and features may vary by state. Group annuity products are available through licensed third parties.
Contract Form Series: 80-1297, 80-1297OR