Pension offer? Lump sum? Or monthly pension?

Many companies are offering lump sums in lieu of the monthly pension. What should you consider as you decide which way to go?

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2 Responses to Pension offer? Lump sum? Or monthly pension?

  1. Larry Frank, Sr. June 11, 2012 at 1:44 pm #

    This article at Reuters talks about companies who transfer their pensions to insurance companies to run. Information about the strength and funding of annuities is a little more opaque to consumers who need to rely upon government oversight of the company. The problems pensions and annuities face today stem from a fundamental disconnect between the asset base providing the pension cash flows, and the required cash flows which are very loosely connected to that base through assumptions.

    Those cash flows have also been sweetened during good times with greater pension payments and cost of living adjustments as contributing factors to pension stresses. All these assumptions and contributing factors have come under stress during this economic downturn which has tended to widen the disconnect gap I mentioned above. Transferring risk from one company to an insurance company may work. However, as the article points out, capacity to absorb funding risk is limited. The theory behind transference to an insurance company is their ability to mix everything together. This might work, except when everybody in the pool is underfunded, where’s the extra money coming from to fill that gap?

    Those stresses may go away if pensions had an ability to adjust payments to match asset values supporting the payments. In truth, this is what people need to do with their own assets. Assuming that all will be okay because “they” running the plan know better could lead to surprises for the younger participants in pensions and annuities when they have outlived the pot of money. And that will not be until those younger participants today are much older.

    In other words, too many people getting a good deal may sound good … but where does the money to do that come from? Is it from rosy assumptions? My opinion is that rosy assumptions have caused many of the stresses in the first place. Don’t get me wrong, some will work out. What is unknown today are those plans that won’t many years hence.

  2. Larry Frank, Sr. December 5, 2014 at 9:32 am #

    Are traditional pensions really ‘a better bang for the buck?’ by Andrew G. Biggs December 4, 2014 2:12 pm | AEIdeas

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