How Pension Outsourcing Could Hurt Your Retirement
Around the country, employers have increasingly moved away from pension plans that require them to take responsibility for their workers' retirement benefits. As a result, it's getting extremely rare for younger workers to have access to a traditional pension plan, with the more likely offering being a 401(k) plan that requires workers to take on investment responsibilities.
But the move away from pensions goes beyond changes for new hires. Companies have also taken some dramatic steps to try to make their pensions easier to handle, or when they can, to get rid of having to deal with them entirely.
Verizon's pension outsourcing
Earlier this week, Verizon finalized a deal originally announced in October that allowed it to move some of its pension obligations out of its hands. The company's strategy was simple, as it did something that financial planners might well advise a retired client to do: It went and bought an annuity.
Specifically, Verizon transferred $7.5 billion in pension commitments to Prudential , basically buying annuities for the 41,000 former management employees that had been covered under the pension plan. Prudential will take on the responsibility of paying retirees the same benefits they had been receiving directly from Verizon, while Verizon will no longer have to worry about investing pension-fund assets to deliver promised payouts to those workers. All in all, the $7.5 billion represents about a quarter of the assets that Verizon manages for all of its pension obligations.
But the retired workers involved aren't happy about the move. In a lawsuit, they argued that if something happens to Prudential, they'll no longer be covered under the Pension Benefit Guaranty Corporation and could therefore lose their benefits. They also said that Verizon was breaching its fiduciary duty to diversify by concentrating benefits into an annuity option. The court, however, didn't accept those arguments and ruled in Verizon's favor.
Following in GM's footsteps
Verizon isn't the first company to make this move. Earlier this year, General Motors did the same thing with about 110,000 of its salaried retirees, with Prudential again winning the business.
Many GM retirees had a big advantage over Verizon's former workers, though. GM gave 44,000 of its white-collar retirees the choice to take a lump-sum payment in lieu of the monthly pension benefit. In other words, GM gave its workers an opt-out provision that would have let them decide how to invest the value of their pension benefits, rather than farming out the responsibility to Prudential. About 30% of the workers that were eligible took that buyout, and Verizon's workers argued in their lawsuit that they should have had the same option GM's workers did.
It's not immediately clear why Verizon would have had a problem giving workers a choice. After all, it presumably transferred a fixed sum to Prudential based on the amounts it was paying to workers and their life expectancies. Diverting that fixed sum away from Prudential and directly to the worker would be a trivial exercise, requiring only the internal corporate infrastructure to handle such requests for thousands of workers.
Moreover, buyout offers have also become quite popular as ways for companies to reduce the uncertainties of pension liabilities. Ford tackled what it saw as a $50 billion risk to its business by making lump-sum offers to nearly 100,000 of its retirees and other former employees earlier this year, as it attempted to reduce its exposure by as much as a third.
Protect your pension
As employers work harder to get rid of pension liabilities, workers who are entitled to pension benefits may find themselves facing tough decisions like this. In general, taking a lump sum gives you the most flexibility, as you can always buy yourself an annuity and get monthly payments with some or all of your money. Yet if Verizon's method becomes more popular, workers and retirees may not get that choice, and insurance companies may end up being the big winners.
Meanwhile, as investments, companies that handle pension risk are actually helping shareholders. For Ford, its pension moves are just the latest in a series of strong business moves it's made lately. But is that enough to make Ford a buy? To answer that question, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's prospects and risks. Simply click here to get instant access to this premium report.
The article How Pension Outsourcing Could Hurt Your Retirement originally appeared on Fool.com.Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.