Pension buyout glossary

Every term you will meet on an offer letter or election form, defined in plain English.

Pension buyout

An offer from a pension plan to pay a participant a one-time lump sum (or sometimes an immediate annuity) in exchange for giving up future monthly pension benefits. Also used loosely for pension risk transfers to insurers.

Lump sum window

A limited election period, commonly 30 to 90 days, during which eligible participants may accept a lump sum in place of their future monthly pension. Missing the window leaves the pension unchanged.

Pension risk transfer (PRT)

A transaction in which an employer purchases a group annuity contract from an insurance company, shifting responsibility for paying pension benefits to the insurer. Benefit amounts stay the same; the guarantor changes.

417(e) segment rates

Three IRS-published interest rates, derived from corporate bond yields, used to calculate minimum lump sum values. Segment 1 discounts payments in years 1 through 5, segment 2 years 6 through 20, and segment 3 beyond year 20. Higher rates produce smaller lump sums.

Lookback month

The month whose published segment rates a plan uses to calculate lump sums for a given stability period. Defined in the plan document.

Stability period

The period, often a plan year, during which a single rate snapshot applies to all lump sum calculations. Rates reset at the next stability period.

Accrued benefit

The monthly pension a participant has earned to date, typically expressed as an amount payable at the plan's normal retirement age.

Deferred vested participant

A former employee who earned a vested pension benefit but has not yet started receiving it. The most common target group for lump sum buyout windows.

Single-life annuity

A pension payment form that pays for the participant's life only and stops at death. It has the highest monthly amount but no survivor protection.

Joint and survivor annuity

A payment form that continues some percentage of the benefit, commonly 50, 75, or 100 percent, to a surviving spouse. Federal law makes a qualified joint and survivor annuity the default for married participants unless the spouse consents otherwise.

Spousal consent

Notarized written agreement from a participant's spouse, generally required before electing a lump sum or any option that waives the qualified joint and survivor annuity.

Direct rollover

A transfer of an eligible distribution straight from a plan to an IRA or another employer plan, with the check payable to the receiving custodian. No tax withholding applies and nothing is taxable in the year of the rollover.

Mandatory 20 percent withholding

Federal income tax withholding required when an eligible rollover distribution is paid to the participant instead of being directly rolled over. Avoided entirely by electing a direct rollover.

60-day rollover rule

The deadline for depositing a distribution paid to you into an IRA or plan to avoid taxation. Missing it makes the distribution taxable, with a possible early distribution penalty.

Hurdle rate (implied return)

The annual investment return a lump sum would need to earn to reproduce the monthly pension payments it replaces for as long as the participant lives. The single most useful number for comparing an offer to the pension.

Break-even age

The age at which cumulative pension payments overtake the value of the lump sum under a given return assumption. Living past the break-even age means the monthly pension was the better deal.

PBGC

The Pension Benefit Guaranty Corporation, a federal agency that insures most private-sector defined benefit pensions up to legal limits and pays benefits if a covered plan fails. Coverage ends when benefits are transferred to an insurance company.

State guaranty association

A state-level safety net, funded by insurers, that continues annuity payments up to state-specific limits if an insurance company fails. The backstop for pensions moved in a risk transfer.

Group annuity contract

The insurance contract an employer purchases in a pension risk transfer. It obligates the insurer to pay the covered participants their plan benefits for life.

Plan termination

The formal shutdown of a pension plan. In a standard termination the plan settles all obligations, typically through lump sums and an insurer annuity purchase; in a distress termination the PBGC takes over an underfunded plan.