Industry News

On September 11, 2024, the American Academy of Actuaries (AAA) published its issue brief, Public Pension Plans: Helping Members Evaluate Buyout Programs and Other Lump Sums. The brief was authored by the AAA’s Public Plans Committee. It presents information that may help members of public pension plans that are offered buyout programs to compare the value of lifetime benefits to the buyout or other lump sum amounts.

The issue brief suggests that members should always receive an explanation of the buyout calculation which should indicate the present value calculated by the plan and the percentage of the present value used to determine the buyout amount, if applicable. In addition, the brief also suggests that it would be helpful for members to have: 1) an estimate of the cost to replace the benefits that would be payable in the private market; and 2) an estimated annual investment return on the buyout amount required to replace the pension benefits that would be relinquished assuming an average life expectancy.

Some of the key assumption findings include:

• Higher discount rates produce smaller lump sums;
• Lower assumed Cost-of-Living Adjustments (COLAs) produce smaller lump sums;
• Mortality assumptions may significantly affect the amount of the calculated lump sum; and
• In addition to the other assumptions, most buyout programs apply other factors or adjustments to the lump sum calculation.

Importantly, the Committee cautions that members should consult with a professional fiduciary financial adviser prior to making a significant irrevocable decision for a buyout offer based on their individual circumstances.

Among other members, the AAA’s Public Plans Committee includes Judith Kermans, President, CEO and Senior Consultant at GRS. 

The issue brief is available here.