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:

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