New York Codes, Rules and Regulations › Title 3 - BANKING › Legal Interpretations › LI 4 - Savings Banks and Savings and Loan Associations › Section LI 4.11 - Lump-sum payments to retiring employees in lieu of pension

Current through Register Vol. 46, No. 28, July 10, 2024
The department was asked whether it would be permissible
				  under sections 250 and
				  400 
				  of the Banking Law for a retiring employee of a savings bank or savings and
				  loan association which participates in a retirement plan to waive part or all
				  of his annual pension and accept instead a lump sum equivalent to the amount
				  actuarially necessary to fund the pension waived. The following example
				  illustrates the question:
Assume Employee A is entitled under a plan to an annual
				  pension of $9,000 at age 65, which amount is equal to 60 percent of average
				  final three-year earnings preceding retirement of $15,000. Let us assume that
				  the total reserve required at retirement to fund the pension is $100,000.
				  Employee A would like to take $50,000 or half the reserves necessary to fund
				  his benefit in a lump-sum payment at retirement, with the remaining $50,000 to
				  be used to provide him with a life-time benefit of $4,500 per annum.
The department in response reiterated its long-standing view
				  that such lump-sum payments are legally impermissible. For, one thing, pension
				  plans create a trust in favor of the retired employee. As in any inter vivos
				  trust the legal title is separated from the beneficial interest. Most plans
				  specifically provide that a pensioner's right cannot be assigned. Furthermore,
				  various provisions of the New York State law grant pension rights a more
				  privileged status than is accorded to other forms of deferred compensation. In
				  sum, therefore, it would appear likely that sections 250 and 400 were designed
				  not only to prohibit misapplication of the depositor's funds, but also to
				  protect the retired employee by providing for periodic payment of pension
				  benefits. Were this not so, the statute might have provided for severance pay
				  instead.
In addition, the department noted that permitting such
				  payments could work financial harm on such plans, to the possible detriment of
				  employees entitled to plan benefits after a given employee takes his lump sum.
				  This would result if actuarial assumptions proved to be inaccurate over a
				  period of time (for instance, if actual longevity of retirees were greater than
				  expected), so that additional funding for the plan or system was needed to
				  provide appropriate pensions.
Finally, the department gave weight to the related fact that
				  the single amount actuarially calculated as necessary to fund a given pension
				  assumes, for purposes of that particular pension, earnings over the projected
				  period of retirement at a rate considerably lower (say four percent) than that
				  which the monies actually earn, with the overage credited to the plan
				  generally, creating a "cushion" designed at least in part to minimize the
				  adverse impact of invalid actuarial assumptions. To deprive plans of this
				  earnings margin could adversely impact upon benefits later payable to persons
				  other than the one having elected and received the lump sum.
DATED: July 24, 1973