Lockheed Lump-Sum Payments Highlight Opportunity

Lump-sum payments from Lockheed Martin’s defined benefit pension plan to certain former employees significantly reduced its pension benefit obligations—though not enough to offset a mortality-related increase.

Lockheed said in a recent filing with the Securities and Exchange Commission (SEC) that it made lump-sum payments of $427 million last year to certain pension plan participants who had not started receiving their vested benefit payments. The action reduced the corresponding benefit obligation by $529 million, according to the Lockheed filing.

In the SEC filing, the company noted that the measurement of benefit obligations is affected by key assumptions such as discount rates, employee turnover and participant longevity, among other factors. Its benefit obligations at December 31, 2014, reflect new longevity assumptions, which had the effect of increasing the defined benefit pension benefit obligations by $3.4 billion despite the sizable lump-sum payout.

Lockheed Martin utilized a discount rate of 4.00% when calculating its benefit obligations. It noted that an increase of 25 basis points (bps) in the discount rate assumption, with all other assumptions held constant, would have decreased its DB benefit obligation by approximately $1.5 billion, while a decrease of 25 basis points would have increased the obligation by the same amount.

Some retirement specialist advisers and plan service providers see a big opportunity in supporting pension plan sponsors, like Lockheed, as they evaluate means to reduce costs and risks associated with running an ongoing pension plan (see “Pension Risk Insights Can Be Significant Value Add”).

A 2014 report from Aon Hewitt found 62% of pension plan sponsors are somewhat or very likely to adjust their plan’s investments in 2015 to better match the liabilities in the year ahead—a task advisers are well-suited to support. The same report found lump-sum window settlements are becoming increasingly popular. Twelve percent of plan sponsors had recently introduced or expanded the availability of lump-sum windows for retirees or terminated vested participants, according to Aon Hewitt, and 43% said they were somewhat or very likely to complete a lump-sum window for inactive participants in the next year.

Lockheed’s 10-K filing is here.