Lump Sum Opportunity: Interest Rate Arbitrage

Interest rates have been moving around a lot lately, with some days seeing swings of more than 10 basis points. That kind of volatility can be frustrating, but it can also create real opportunities for pension plan sponsors, especially when it comes to lump sum windows.

If your plan does not currently offer lump sums as an ongoing form of payment, you could amend the plan for a one-time lump sum offer equal to the present value of the participant’s annuity. Paying these out settles the obligation, reduces the number of people in the plan, and helps lower PBGC premiums, which now sit at $111 per person each year. That alone is often reason enough to consider a lump sum window.

But in certain environments, the opportunity goes well beyond simple plan cleanup and premium savings.

The real edge comes from the difference between how lump sums are calculated and how pension liabilities are measured for accounting purposes. Lump sums use IRS segment rates that are set in advance with a lookback period and stability rules. Those rates stay locked-in during the window. Accounting liabilities, on the other hand, use current market rates at the measurement date.

That gap can create a meaningful arbitrage opportunity.

If rates rise and then fall, you can end up settling liabilities using the higher, previously locked-in rates while your accounting liability reflects the lower current rates. When that happens, you settle the obligation for less than what shows on the balance sheet.

We saw this play out strongly in 2023 and 2024. Rates peaked in October 2023 and then dropped more than 100 basis points by September 2024. Sponsors who offered lump sums during that time used the higher late-2023 segment rates even as their accounting liabilities had already grown because of the falling rates.

The economic advantage was substantial and varied significantly by age:

Age​	2024 Lump Sum* Savings Compared to Liability​**
40​	35%​
50​	27%​
60​	17%​

*Based on October 2023 417(e) segment rates and 2024 unisex mortality **Based on a 4.80% accounting discount rate and 2024 unisex mortality

Many sponsors also took advantage on the asset side. As rates declined, fixed income values went up. They reallocated some of those assets to fund lump sum payments that were still based on the higher locked-in rates. For most, this created material balance sheet gains on the group that took the lump sums.

That was a particularly strong example, but this type of opportunity is not rare. It tends to appear whenever there are sharp movements in interest rates, especially when those movements reverse over a short period.

With rates remaining elevated and volatility continuing, a similar opportunity could easily appear again. If rates decline from current levels, the sponsors who are fully prepared will be positioned to act fast and capture significant value.

The main takeaway is simple: The sponsors who benefit most from these windows are the ones who are already prepared. If you want to make sure your plan is ready to move when the next opportunity opens, let’s talk.