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Aon Retirement and Investment Blog

2014 Lump-Sum Windows: An Update on Plan Sponsor Experience

Pension settlement strategies continue to generate significant interest from U.S. private pension plan sponsors with many notable transaction announcements.  Jumbo annuity purchases and retiree lump-sum windows get the most attention, but offering lump sums to terminated vested employees continues to be the most prevalent strategy.

In a recently published white paper, “2014 Lump-Sum Windows: Update on Plan Sponsor Experience” we:

  • Highlighted trends related to lump-sum window prevalence;

  • Reviewed plan sponsor experience implementing lump-sum windows in 2014;

  • Summarized best practices related to lump-sum window implementation; and

  • Provided a brief summary of related transactions, such as cash-out sweeps, repeat lump-sum windows, “reminder” projects, and retiree lump-sum windows.

In this post, which focuses on U.S. private sector pension plans, we summarize terminated vested lump-sum window election rates, discuss investment considerations related to lump-sum windows, and provide thoughts on next steps for plan sponsors.
Terminated Vested Lump-Sum Election Rate

One of the questions we hear most frequently from plan sponsors is “What take rate should we expect?”

To answer this question, we analyzed plan sponsor experience related to 70 terminated vested lump-sum windows during 2014, covering approximately 290,000 participants. Total lump-sum payments in these windows exceeded $4 billion and the total lump sums offered exceeded $8 billion.

The average lump-sum election rate from this data set was 58%, with wide variation among the plan sponsor experience. A graph showing plan sponsor experience is below:


The average plan sponsor election rate is an important data point for general planning purposes, but the dollar-weighted election rate is more appropriate for investment analysis. The 2014 lump-sum election rate, calculated as a dollar-weighted average for plan sponsors, was 49% (compared to 58% when not weighted by dollar amount).

As can be seen from the chart below, the lump-sum election percentage decreased as the size of the lump sum increased.


Each circle in the above graphic represents the lump-sum election percentage for 1,000 participants with similar lump-sum amounts from $5,000 to $150,000. Over 97% of the participants in our study had a lump-sum benefit of less than $150,000.

Investment Considerations

With this dollar-weighted average in mind, there are a few key investment considerations that should be reviewed as part of lump-sum window analysis.

First, plan sponsors must ensure they have the necessary liquidity to fund the lump-sum payments.   On average, about half of the available lump sums will be paid, which can be a significant liquidity event for the plans.  Of course, as we mentioned above there is significant variability in the results, so that should also factor into the liquidity planning.

Second, plan sponsors need to consider what, if any, risk they maintain associated with the assets that back the lump-sum payments.  For many plan sponsors, the interest rates used to calculate lump sums only change once per year, so the payment amounts are not subject to interest rate risk. For many plan sponsors, a low volatility strategy, such as cash or ultra-short-term fixed income, will be the most appropriate investment strategy for assets that back the expected lump-sum payments

Third, plan sponsors may wish to revisit their investment strategy after the window. Terminated vested participants tend to have liabilities with longer durations than the plan as a whole. Thus, settling these liabilities tends to reduce the plan’s duration, adjusting the plan’s Liability Driven Investment strategy.

And fourth, plan sponsors may wish to revisit their funding strategy. Large lump-sum payments can have a significant impact on a plan’s funded status and contribution requirements. Thus, the period immediately following a window is an ideal time to refresh cash flow projections and the need for future contributions.

Next Steps

Several of the best practices we highlight in the white paper are related to preparation for the window, which is critical to ensuring a successful outcome to the project. A thoughtful and robust implementation requires that plan sponsors move forward with the program at least six months before the planned distribution date.

Plan sponsors that are interested in a 2015 lump-sum window should begin work as soon as possible in order to facilitate an orderly implementation. 


Chris Birch is a Partner and actuarial consultant at Aon Hewitt working out of the Chicago office. 

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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