Changes in interest rates, Pension Benefit Guaranty Corp. premiums, and mortality assumptions may affect plan sponsors’ decisions to de-risk (or not de-risk) defined benefit plan liabilities in 2019.

Note that for purposes of this article, by “de-risking” we mean paying out a participant’s benefit as a lump sum and thereby eliminating the related liability.

We illustrate our analysis of the effect of interest rates and PBGC premiums on the de-risking decision by using a (relatively simple) example: the cost-of-benefit and de-risking gain with respect to a terminated vested 50-year-old individual who is scheduled to receive an annual life annuity of $1,000 beginning at age 65.

We note that the IRS recently published Notice 2019-18, which states that it “will not assert that a plan amendment providing for a retiree lump-sum window program causes the plan to violate [required minimum distribution rules].” Therefore, the analysis below generally applies to lump-sum payments to retirees as well as pre-retirees.

For our example participant, increases in interest rates (November 2018 vs. November 2017) have reduced the 2019 base cost of paying this participant a lump-sum benefit, vs. 2018, by around $1,200. On our assumptions, if a 50-year-old individual with a $1,000 benefit had been paid out in 2018, the cost would have been $7,867; in 2019 the cost would be $6,671.

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