Pension Plan Buyout: The Exception to the Rule

I realize this is an anomaly, but my wife Suzie is in a much better financial position today because she cashed out her Defined Benefit pension for a lump sum payment.

Neither Suzie nor I understood the reasons why the offer was so generous. The financial advisor we consulted about the proposed surrender value also didn't get the logic but strongly suggested we take the deal.

I don't like little mysteries that defy normal thinking, so over the last while, I've tried to piece together a reason for the offer. My thoughts on this are speculative, but I believe they're on the right track.

At the time of the offer, Suzie hadn't worked for the bank for ten years. It was a large, globally diverse UK banking group that had a "super-funded" pension plan. This plan's assets were well above what was required to meet its future obligations. From what I can gather, the company wanted to freeze the plan and close it to any future accruals, which it has since done.

At the same time, government bond yields—specifically U.S. Treasury yields, which have a massive impact on pension values—were at an all-time low. Because of this factor, I believe the plan essentially had to offer a large lump sum to "buy back" the guaranteed income liability.

When you combine these two very favorable situations that happened to come together at the right time, I think I have a reason for the generous offer. It was a classic case of corporate financial strategy and macroeconomic conditions creating an extraordinary opportunity for a pension plan member.

While we were already in a strong financial position before the offer and can't honestly say it transformed our lives or retirement prospects, I know it certainly did for some of Suzie's former colleagues. Sometimes life is full of unexpected gifts, and we were happy this one came calling.

I thought you might find this case study of interest. I'm UK based and although I've used the term US treasury yields in reality it was the UK government equivalent, UK guilt yields.

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