Pension Risk Transfer

AAA

DEFINITION of 'Pension Risk Transfer'

When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits. Companies transfer pension risk to avoid earnings volatility – they no longer have to pay for unfounded pension obligations – and to free themselves to concentrate on their core businesses.

INVESTOPEDIA EXPLAINS 'Pension Risk Transfer'

The total annual cost of a pension plan can be hard to predict due to variables in investment returns, interest rates and the longevity of participants. Large companies had been holdouts to the national trend of transferring pension planning responsibility to employees, but that began to change in 2012, when a range of Fortune 500 players sought to transfer pension risk. This included Ford Motor Co. (F) , Sears, Roebuck & Co., J.C. Penney Co. Inc. (JCP) and PepsiCo Inc. (PEP) – which offered former employees an optional lump-sum payment; and General Motors Co. (GM) and Verizon Communications Inc. (VZ) – which purchased annuities for retirees. (See also: risk shifting and transfer of risk.)

RELATED TERMS
  1. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  2. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Coastal Barrier Improvement (CBI) ...

    A federal law that makes federal disaster relief and federal ...
  5. Directors And Officers Liability ...

    Directors and officers liability insurance covers you if you're ...
  6. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
RELATED FAQS
  1. When can benefits be received from a provident fund?

    Like most retirement savings vehicles, participants in provident funds are eligible to receive benefits at retirement. However, ... Read Full Answer >>
  2. Is Social Security Income a perpetuity?

    Because Social Security income does not continue indefinitely, it cannot be classified as a perpetuity. What Is a Perpetuity? A ... Read Full Answer >>
  3. What kinds of costs are included in Free on Board (FOB) shipping?

    Free on board (FOB) shipping is a trade term published by the International Chamber of Commerce or ICC, that indicates which ... Read Full Answer >>
  4. How does a provident fund compare to U.S. Social Security?

    A provident fund shares many attributes of the U.S. Social Security program, including government sponsorship and set contribution ... Read Full Answer >>
  5. What type of asset allocation should I use if I am already retired?

    Among investors, asset allocation is a topic of discussion that receives a great deal of weight during the asset accumulation ... Read Full Answer >>
  6. I'm in my 50s. Should I still participate in my company's Roth 401(k)?

    Participating in an employer-sponsored Roth 401(k) program is an excellent way to plan for retirement at any age. The longer ... Read Full Answer >>
Related Articles
  1. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  2. Retirement

    Top 7 Signs Your Pension Fund Is In Trouble

    How to tell if your company’s pension is being depleted - will there be anything left for you?
  3. Fundamental Analysis

    Understanding Modern Portfolio Theory

    Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance.
  4. Investing Basics

    Explaining Idiosyncratic Risk

    Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.
  5. Insurance

    Who Needs Extortion Insurance?

    Insurance can help mitigate the financial damage of an extortion plot, but it’s important to read the fine print before taking out one of these policies.
  6. Personal Finance

    Affordable Ways For Upgrading Your Home

    Upgrading your home doesn’t have to be an expensive chore. Here we give you 8 affordable ways to increase its appeal.
  7. Insurance

    Indexed Universal Life Insurance: The Pros & Cons

    What you need to know, to see if these vehicles fit into your financial plan.
  8. Retirement

    Millennials: Retire With $1,000,000 --Here's How

    It is possible for Millennials to retire with $1,000,000, if they take the right steps and make the necessary sacrifices now.
  9. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  10. Professionals

    Gay Marriage Ruling: Its Impact on Estate Planning

    Same-sex couples now face the same legal and financial issues as heterosexual couples; some may need to adopt simpler, more mainstream financial plans.

You May Also Like

COMPANIES IN THIS ARTICLE
Hot Definitions
  1. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  2. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  3. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  4. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  5. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  6. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!