The federal government moved to limit pension de-riskinglast month when it prohibited companies from offering lump-sumbuyouts to pension plan participants who already are receiving apension.

While the announcement fromthe Internal Revenue Service put an end to that type of lump-sumoffer, consultants said they still see a booming market for pensionde-risking transactions. The IRS move leaves some question, though,as to whether the government might take additional steps toregulate this area.

Companies can use two kinds of transactions to reduce theirpension obligations: the offer of lump-sum buyouts to planparticipants or the purchase of an annuity from an insurancecompany, which effectively transfers responsibility for a certainportion of plan participants to the insurer.

Rick Jones, a senior partner in the retirement and investmentpractice of consultancy Aon Hewitt, said that an Aon Hewitt surveyreleased a few months ago showed that 8% of corporate pension plansponsors said they were “very likely” to offer lump sum buyouts toretirees in 2015, while 19% said they were “moderately likely” todo so.

“It's not a strategy every plan was contemplating, but it was inplace and in the works for a number of organizations,” he said. Inthe wake of the IRS's limitation, which went into effect on July 9,the day it was announced, Jones predicted companies will considerthe alternatives, which include lump-sum offers to former employeeswho are vested in the plan. Other consultantsargued that the IRS limit will have little effect becausecompanies' lump-sum offers target former employees much more oftenthan retirees.

“People who are retired typically are counting on the money, sothere is some concern that one shouldn't rock the board,” saidStewart Lawrence, senior vice president and national retirementpractice leader at Sibson Consulting. “There's also a concern aboutwhat's known as anti-selection, that retirees in ill health aremore likely to take the lump sums.”

Malcolm Hodge, a senior partner in the retirement business ofconsultancy Mercer, said that when Ford Motor offered lump sums to retirees in 2012, about a thirdaccepted the offer.

“Likely the two-thirds that didn't take it are going to havebetter longevity,” Hodge said, adding that those retirees' longerlives could mean 5% to 10% in additional expense for the plansponsor. “On the whole, you've just cost yourself money.”

Aon's survey showed that 47% of companies said they were verylikely or moderately likely to offer a lump-sum buyout to formeremployees this year, which is higher than the 27% likely to do alump-sum offer to retirees. However, Jones said that the portion ofpension plan liabilities that involve former employees is usuallysmaller than the portion involving retirees. “So plan sponsors wereviewing the retiree lump sums as a way to de-risk fairlysignificant blocks of liabilities,” he said.

IRS and mortality tables

A separate, more recentIRSnotice could have some effect on the timing of lump-sum offersover the remainder of the year. Lawrence, pictured at left, notedthat in late July, the IRS announced that it will not adopt updatedmortality tables the Society of Actuaries released last year foruse in lump-sum calculations until 2017.

The new tables show that people are living longer, so when theIRS incorporates them, it will increase the cost of lump sums.

Some companies may have planned to do lump-sum offers this yearbecause they expected the IRS to switch to the new mortality tablesat the start of 2016, Lawrence said.

“Now they're being told by the IRS the window will be open for ayear and half,” he said. “Maybe they're willing to sit tight untilwe see where interest rates are going. That might take a little bitof wind out of the sails for the remainder for 2015.”

Even if lump-sum activity slows later this year as a result,“all that will do is push it into 2016,” Lawrence added.

Annuitization still secondplace

Plan sponsors prefer lump-sum offers to annuity purchasesbecause of the cost.

“An annuity in general is more expensive than the lump sumsright now and with interest rates being as low as they are,annuities are particularly expensive,” Lawrence said. “They're nothappening as much in this country [as lump sums].”

Still, Mercer estimates that pension plan sponsors' annuitytransactions will total $10 billion this year, up from $8.5 billionin 2014 and $3.8 billion in 2013, and it predicts activity incoming years will range between $10 billion and $15 billion.

The IRS prohibition on lump-sum offers to retirees wasunexpected, but consistent with the federal government's concernsabout lifetime income for retirees.

Additional regulation is seen as possible, especially in thearea of lump-sum disclosures, after the Government AccountabilityOffice released a report earlier this year that criticized thedisclosures that companies provide to participants being offeredlump sums.

“Regulatory groups are looking quite closely at disclosures,”Matt McDaniel, head of the U.S. defined-benefit risk practice atMercer, said during a webcast last month. “It would not surprise meat all to see model disclosures.”