Reasons For Termination

Terminal Funding 

When a pension plan, or part of a pension plan, is shut down, the plan sponsor must fund the future payment of current benefit liabilities resulting from that plan. This is usually accomplished by either:

  • Making a one-time, lump sum payment to each participant, or
  • Settling the liability through the purchase of group annuity contract (Terminal Funding)

The purchase of a group annuity contract transfers both the liability and the administration of the plan from the plan sponsor to an insurance company. With terminal funding programs the need often is a result of:

  • Specific market forces such as bankruptcy, merger and acquisition, consolidation
  • Desire to save plan costs such as rising administrative fees and plan valuation and service expenses

Why Plan Sponsors Terminate Plans

The purchase of a group annuity contract can help resolve problems that a Plan Sponsor has been dealing with concerning their Pension Plans. Some of the common reasons for a plan closeout are:

  • Mergers & acquisitions
  • Bankruptcies
  • Plant shutdowns or layoffs
  • Access to excess assets in a plan (overfunded plan)
  • Shift in a benefit philosophy from a defined benefit plan to defined contribution plan
  • Court ordered liquidation

Retirement Plan Terminations

A number of forces can lead to the sound decision to terminate a retirement plan, including:

  • Market actions such as a company merger, consolidation or bankruptcy
  • Corporate desire to phase out old and underutilized plans in order to focus efforts on more participant-friendly retirement options
  • Financial concerns surrounding the continued cost of administration and funding of plan benefits

Benefits to a Plan Sponsor

By transferring the plan administration and payment liability, a plan sponsor can effectively:

  • Eliminate ongoing cost of administering the pension plan internally including:
    • Actuarial costs and accounting fees
    • Legal and trustee fees
    • Investment advisory fees and PBGC premium
  • Remove liability from corporate balance sheet and provide a way to access any excess funding that has accrued in the pension plan
  • Provide financial security to plan participants through payments guaranteed by a quality Insurance carrier

Benefits to a Plan Participant

A Terminal funding contract benefits plan participants with:

  • Dependable retirement benefit payments from a stable, financially strong insurance company
  • Increased participant confidence in the safety of their benefit payments
  • Expert customer service and timely financial reporting