Employers looking to derisk by offering workerslump-sum buyouts could be depriving those employees of potentiallygreater benefits if they'd just stuck with the pensions they'd beenearning in the first place. (Photo: Shutterstock)

It's not a hard and fast rule, but employees could be gettingthe short end of the stick if they take an employer-offered buyoutinstead of sticking with a pension.

A Forbes report points out that employers looking toderisk by offering workers lump-sum buyoutscould be depriving those employees of potentially greater benefitsif they'd just stuck with the pensions they'd been earning in thefirst place.

Regarding buyout offers, it says, "financial experts have warnedrepeatedly that this can be a poor decision for participantsbecause the value of a pension goes beyond the dollar amount of thepayments made over time. That's because the actuarially faircalculation the company is required to perform is not the same aswhat it costs to buy an annuity that protects you against outlivingyour assets."

While that's technically not "cheating" employees, it can enticesome who would be better off with a lifetime benefit to accept alump sum that they're not going to benefit from as much, or aslong, as they would with a pension.

But now there's a new wrinkle, the report says. An example of itaccompanies GE's recent pension freeze. The report explains thatthis new strategy offers employees "the option to begin theirretirement benefits well in advance of the usual benefitcommencement date."

GE had already closed its pension plan, according to a Reuters report, back in 2012, and its planswere underfunded by about $27 billion at the end of 2018. As partof its effort to cut its underfunding and reduce debt, GE froze itsplans and offered lump sums to former workers; it also plans toprepay about $4.5 billion in contributions due in 2021 and2022.

A Wharton report explains that GE took those drasticsteps—freezing pensions of 20,000 workers with salaried benefitsand supplementary pension benefits for about 700 executives, aswell as offering buyouts to another 100,000 former employees whoaren't yet drawing benefits—in its quest to cut its pensionliabilities.

But because of the extent of its underfunding, says the report,if for some reason GE were to go into bankruptcy its pension planwould head to the Pension Benefit Guaranty Corporation, whichalready lacks sufficient funding itself to handle a liability ofthat size.

In addition, the report quotes Olivia S. Mitchell, Whartonprofessor of business economics and public policy, saying thisabout GE's assertion that the buyout payments will not increase itspension plan underfunding:

"What that suggests to me is that the lump sum buyouts willprobably be less than the expected value of the lifetime incomepayments that the retirees would get if they accepted the long-termpayments," Mitchell says, adding, "But how much less? We just don'tknow yet."

The Forbes report says that GE offered "two new options toeligible employees: in addition to retirement benefits payable atage 60 or 65, participants may elect a lump sum payable immediatelyor an 'early pension option' in which benefits would also startimmediately. In this case, the individual was 53 years old and themonthly benefit offered for starting right away was only 45 percentof the monthly benefit at age 60."

The fine print, it continues, explained that "GE offers apension with a 'normal retirement date' of 65, and the lump sumvalue and the early pension option monthly benefit were both basedon the actuarial equivalents to the monthly age-65 benefit." Butthe plan also contained an option for an "early retirement subsidy"that would provide full benefits with no reduction, but wouldn'tkick in unless/until the employee hit 60. Employees accepting the"early pension option" would lose out on this subsidy.

GE isn't the only company doing this, either. Forbes points outthat UPS is also offering what it terms a "Special Pension PaymentOffer," which gives an option for early pension benefits—alsosubstantially smaller than what employees would get if they waitedtill retirement age.

While companies are providing explanations of the long-termconsequences of such an option, it's not clear that employeesreally understand what they are giving up if they choose the earlypension benefit—or how much that can amount to over the course oftheir lives.

As the report asks, "[C]ompanies are following the law. But arethey acting ethically?"

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