Accurate Data Is Important When Ending a Pension

November 19, 2013 ( – More employers are expected to terminate their pension plans as a result of rising interest rates, according to Findley Davies.

The rate increases make it easier and cheaper to sell pension liabilities to insurance companies, says the independent consulting firm. By shedding a pension plan, employers initially divert its risks to insurers. Ultimately, employers will divert the retirement risks to employees and retirees.

Terminating a pension plan is complicated, detailed and intense, the firm says, but the process can be made smoother and more predictable.

The first step to take is choosing an appropriate type of replacement retirement program. Questions to ask include: Is additional cash needed to fund up the plan termination liability? What is the impact of the termination on the company’s financial statement? “Establishing an investment policy for the termination is very important,” Neville A. Arjani, principal and chief actuary of Findley Davies Inc., told PLANSPONSOR.

Every pension termination needs a team of people, including the plan sponsor or plan administrator; communications professional; actuary; benefits administrator; ERISA attorney; employee relations attorney; investment adviser; trustee; annuity consultant; and potential annuity providers.

The time frame can last longer, Arjani says, but 12 to 18 months is generally what Findley Davies says is the length of time from the formal initiation of the process to actual distribution. “This time frame assumes the plan sponsor will request a determination from the IRS (Internal Revenue Service) that the termination of the plan will not adversely affect its qualified tax status,” Arjani says. Filing with the IRS makes the process longer; if a plan sponsor does not file with the IRS, the termination process can take between six and 12 months, according to Arjani.

Accuracy Counts 

“A significant factor in the time frame is the degree of accuracy of the calculated plan accrued benefits and underlying data,” Arjani says. “Taking action early in the process to find missing participants is also a factor.”

Findley Davies breaks the process into four steps of preparation: financial; plan design; data; and employee communication.

The steps involved in preparing data can vary depending on a plan sponsor’s situation, Arjani says. Some sponsors have accurate data because they’ve maintained it themselves or their actuary develops accurate data. “Other sponsors may not maintain exact data,” he notes, “and in these cases, a lot of effort should be spent before the formal termination takes place to build an accurate data base and accurate plan benefits.”

Keeping accurate addresses is critical, Arjani points out. “Once it’s time to distribute benefits, there is not much time to make an address search,” he says. Normal administration during the entire process is also important. Data corrections, changes in status (new retirees, deaths, and so on) should continue to be made. 

Currently, Findley Davies works with companies contemplating pension plan termination. Findley Davies provides advice, coordinates the process and helps with performing each task along the path to terminate a pension plan. “Pension Plan Termination – Aligning the Stars in the Complex Decision-Making Process,” a half-hour webinar, and overview of the tasks needed in a termination are available on the Findley Davies website.