March 13, 2014

March 2014, "Accounting Implications of Offering a Lump-Sum Window to 'De-Risk' a Pension Plan"


Defined benefit (DB) plans are not immune to risk, but there are strategies to keep financial liabilities in check. Lump-sum windows can protect plan sponsors from unexpected plan costs by transferring financial to terminally vested participants. Given the Society of Actuaries' recent release of a possible new mortality standard, which might affect lump-sum calculations in the future, it is expected that many plan sponsors will revisit the merits and demerits of implementing a lump-sum window.

Before pursuing this "de-risking" strategy, plan sponsors should examine the accounting implications, which include the duration of the plan's liabilities; the effect of asset liquidation on both asset duration (and the coordination with liability duration) and asset allocation; and amortization of gains and losses. This Spotlight discusses those accounting implication. It also covers an option for mitigating the negative accounting consequences of lump-sum windows: offering the window to only a portion of the terminated vested population.