One of the biggest retailers in the United States, J.C. Penney Co. Inc., announced earlier this month they have reduced their pension obligations by offering over 50,000 former employees the option between an annuity settlement and cash for annuity payments. In doing so they were able to cut their pension obligations by about $5 billion, or more than 25%, according to the business and industry news site BizJournals.com.
“We are grateful for all the contributions our retirees have made to J.C. Penney,” Chief Financial Officer Ed Record said in a release. “We are confident that Prudential, an expert in this field, will provide great service to our retirees receiving monthly payments.”
The deal included providing annual structured settlement annuity-style payments to 43,000 retirees. The Prudential Insurance Company of America is the company they chose to make the deal with and who will take over the payment obligations.
For people that preferred cash for annuity payments the company also offered a lump sum lottery payout-type option, which 12,000 retirees opted for. Another 1,900 former employees who had deferred vested benefits also chose the lump sum versus annuity option. The deadline to take the lump sum was September 18.
Many people prefer to take the cash because annuities can carry certain restrictions, fines and fees. For example, the ongoing investment management fee for a variable annuity is about 3% a year, many have early-withdrawal penalties of up to 10%, and even “immediate” annuities don’t start paying out until 30 days usually.
The move is in line with J.C. Penney’s recent strategy of reducing pension volatility and further de-risk their overall obligations. The total number of participants in the company’s personal pension plan was reduced by 25-35%.
“These actions not only continue to provide excellent benefit security for our retirees, but also further the Company’s objective of de-risking the Plan while improving the Company’s long-term risk profile,” Record said.