Ford Motor Co.’s recent announcement of a new pension-payout option for retirees may help accomplish the company’s goal of strengthening its balance sheet. But over the years, could that come at a cost to Ford’s bottom line?

The automaker says it will offer 90,000 retirees and former employees the option to take a lump-sum distribution of their pension benefits rather than the normal annuity payments. Historically, lump-sum distributions have been offered only upon a participant’s separation from active employment. More recently, there’s been a trend of pension-plan sponsors making lump-sum offers to former employees who have not yet begun to receive annuity payments.

The new offer of a lump sum for retirees who are already getting pension-annuity payments goes a big step further. Ford and various observers say this is the first such offer from a U.S. pension-plan sponsor.

Internal Revenue Service rules generally have been held to prevent plan sponsors from offering such retirees a new payout election. Ford apparently found a way around that. “We proactively addressed the regulatory and legal issues and received approval to offer this option,” company spokesman Todd Nissen says, also specifying that “we’re not providing additional details about the approval process.”

Individual companies can pay a fee, usually $25,000, to federal agencies for a private-letter ruling on activities that could be construed as violating regulations or laws. Attorney Leon Lebrecque, CEO of wealth-management firm LJPR and the author of Ford’s preretirement program (which provides advice to future retirees), believes that Ford persuaded the IRS that making the lump-sum payout completely voluntary would not violate the prohibition against changing the method of payout.

Ford announced the move during its first-quarter earnings call April 27. CFO Bob Shanks said it would “reduce our pension obligations and balance-sheet volatility.” But the degree to which the company accomplishes that will depend on how many people take the lump sum — and who they are.

Lebrecque, who conducted classes for Ford preretirees throughout the 1990s, estimates it would be advisable for about 20% of those offered the lump sum to take it. That would clearly be a better option for those in poor health, say.

But, says Lebrecque, “I think this will come back to bite Ford. Plan assets gain when people die ‘on time’ or earlier than the actuarial projection, thereby leaving money in the plan. If you take all the unhealthy ones out of the picture, you may have a larger potential liability in the end because you have to put more money into the system in order to fund the benefits for longer-lived retirees.”

Nissen says Ford doesn’t know how many people will take the lump sum and doesn’t even have a clear idea of who will be likely to.

Meanwhile, other plan sponsors will be closely watching how well Ford’s new pension strategy succeeds. Leaving aside the “adverse selection” scenario in which only unhealthy retirees take the lump-sum option, “It could well serve as a precedent, because you’re decreasing a liability on your balance sheet,” says Lebrecque.

Mike Archer, intellectual-capital leader for the North American retirement practice at Towers Watson, says plan sponsors will come to different conclusions about the viability of emulating Ford. That’s because the applicable regulations “aren’t written in an ironclad way and are subject to interpretation,” he says. “We believe some plan sponsors will conclude that the current regulatory framework will support a properly designed” lump-sum offer for retirees.

The IRS could challenge any plan sponsor offering such a program that did not request a determination letter and decide to disqualify the plan, whereupon participants’ benefits would be taxable. In fact, the agency could even challenge those it approved. “Sometimes the IRS says you can do something and later changes its mind,” says Archer. “If one company wants to do something they may say OK, but they might not feel the same way if 1,000 companies do it.”

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