De-risk using an overlay hedge

In recent years, many U.S. corporate pension plan sponsors have offered lump sum benefits payments to terminated vested plan participants. Such lump sum distributions allow sponsors to transfer investment risk back to plan participants by paying out the present value of expected annuity payments in a single transaction. Plan participants who accept the payout are then no longer eligible to receive ongoing annuity payments from the plan.

In addition to transferring investment risk out of the plan, implementing these payouts minimizes the plan’s impact on the corporation's financials, reduces pension plan operating costs and Pension Benefit Guaranty Corporation (PBGC) premiums.

In this Strategy Spotlight, we focus on considerations for effectively managing the risks involved in a lump sum distribution using an overlay hedge.