Employer Puts Pension Surplus To Good Use

The carefully designed move should capture the attention of other over-funded plans, some of whose surpluses range into the billions.

The Richmond, Virginia-based chemical company will first satisfy existing obligations from the existing $546.6 million plan for the 750 active employees and retirees.

The 450 term vested retirees will have a choice of:

• the purchase of deferred annuities (also the default option for those not making a choice)
• a lump sum rollover
• cash payouts if the retiree prefers.

“It’s fairly unusual for this to be done, but the whole process is designed to ensure that no employee is disadvantaged. Everybody gets exactly what they’re entitled to,” said Mary Habel, Manager of Employee Benefits at Ethyl Corporation.

Once those benefits are taken care of, the plan will be left with a surplus of approximately $200 million. Of this:

• 25% of the surplus (approximately), some $50 – $60 million, will be used to start an identical defined benefit plan covering future service obligations for the same 750 salaried employees covered by the old plan
• 30-40% of the remainder after funding the new plan will be paid for corporate income tax
• 20% of the remainder will be required to pay the excise tax for terminating the plan

Whatever is left over will be used to pay down corporate debt – benefiting shareholders, including retirees and current employees.

“The new $60 million plan will start its life overfunded,” said Habel. She explained that using 25% of the surplus this way allowed the corporation to pay only a 20% rather than a 50% excise tax on the remainder of the surplus.

“We’re under no requirement to start a new plan. But we would have started a new defined pension plan in any case with or without this tax consequence,” said Habel.

PR Challenge

Habel and her staff are meeting the public relations challenge of the change head-on, personally meeting with employees. Habel’s own schedule involves some 30 meetings in Ethyl’s Richmond, St. Louis, Houston, and Natchez offices. There also will be video conferences to explain the move and answer employee questions. 

“What we’re seeing primarily is employee concern, an anxiety and uncertainty about what this really means to them,” said Habel.  “We want to explain that this surplus is truly a surplus. It’s money that’s well above what’s needed to satisfy our benefit obligation. Some people ask why we don’t put the surplus toward paying cost of living increases, but we have a very generous pension plan.”

Habel believes Ethyl won’t be the only pension plan to restructure itself in this way. “It’s not an easy process, but I predict that once we are out of the gate with this, other companies are going to be looking at it. Our surplus is peanuts compared to what’s out there – billions, at some plans.”

Ethyl also offers its employees a 401(k) plan, now with assets of $95 million. That plan will not be impacted by the changes. The proposed changes at Ethyl were first reported by P&I.