When Borrowing to Terminate a Pension Plan Costs Less Than Waiting
A borrowing rate that sounds expensive can still be the right financial call once you measure the full cost of waiting.
Compare both strategies over the same period.
When I raise the idea of borrowing to terminate a frozen pension plan, the first reaction is usually some version of "at these rates?" It's a fair question. Nobody likes taking on debt when money isn't cheap.
The trouble is what the loan gets compared to. Most people weigh it against doing nothing, as if waiting were free. It isn't. A frozen plan can keep pulling cash out of the company for years while the sponsor pays to run it and carries the investment, interest rate and longevity risk. And the price of getting out still isn't fixed. It can move a lot.
Borrowing to terminate may feel counterintuitive when interest rates are high. Yet the full cost of waiting can far exceed the cost of financing an exit. Once benefits are properly settled, a fixed-rate, fully amortizing loan replaces that uncertainty with something much easier to plan around: scheduled payments and a date when you're done.
So rather than asking whether the rate is high, I'd ask a different question.
At what borrowing rate does terminating now cost the same as sticking with your current strategy, once everything is projected out? That's the breakeven borrowing rate, and it's the number that should drive this decision.
In many of our recent analyses, the modeled breakeven has come in above 15%, and in some cases above 20%. Every plan's number depends on its own projections, loan terms and comparison period. But if you can borrow below it on otherwise comparable terms, termination comes out ahead under the modeled assumptions.
Why sponsors passed on this before
Borrowing to fund or terminate a plan isn't a new idea. Plenty of sponsors looked at it back when rates were low and debt was cheap. Most of them passed, and funding relief gave them a good reason to.
For plans using statutory segment rates, minimum funding liabilities are generally based on 24-month averages of high quality corporate bond yields. Those rates have to stay inside a corridor around 25-year averages, and the 25-year averages have floors of their own. During the low-rate years, that stabilization often kept funding rates above the rates used to actually settle benefits. [1]
Higher funding rates meant lower statutory liabilities, and often lower minimum required contributions. Funding balances could cut the cash requirement even further. Lump sum calculations and insurer pricing never got that same interest rate relief, though. That's how a plan could be on a contribution holiday and still be short of what it would cost to terminate. [2]
Rates have since gone up, and the gap has narrowed. The IRS tables for September 2026 show lump sum segment rates of 5.06%, 5.99% and 6.72%. The adjusted funding rates for 2027 plan years are 4.75%, 5.25% and 5.89%. Lump sum rates are now higher in all three segments. Annuity quotes can imply higher discount rates too, depending on the benefits and the insurer. Stabilization is still the law. It just doesn't give you the edge over settlement pricing that it used to. [1, 2]
Whether you get a contribution holiday still depends on statutory funded status, funding balances and amortization schedules. But if your cash contributions have come back, waiting can mean years of payments while you keep the risk and keep paying the expenses. That's why financing deserves a fresh look.
Start with the real exit price
Step one is an actual termination estimate that reflects your plan terms, the lump sum lookback rules that apply to you, mortality, benefit options, insurer pricing and implementation expenses. Compare that total to the assets you actually have. An accounting funded percentage won't tell you what it costs to get out, and neither will a minimum funding valuation on its own.
Then add up what it costs to stay open
Next, measure what it costs to keep the plan running: PBGC premiums where they apply, plus actuarial, administration, investment management, trustee, audit and legal fees. Whatever gets paid out of the trust reduces the assets available for benefits, which can make the eventual termination contribution bigger. [3]
This is a big part of why breakeven rates come out so high. The loan only has to cover the termination gap and related costs, while the expenses of staying open run across the whole plan. Here's a rough example. Take a frozen plan with $100 million in assets and 1,500 participants that's $5 million short of its termination cost. The 2027 PBGC flat-rate premium alone is $116 per participant, or about $174,000 a year. Add the other fees and it isn't hard to reach $500,000 a year. That's roughly 10% of the shortfall, every year, before the market does anything. Set that next to the interest on a $5 million loan and the breakeven rates we model start to make sense.
Interest rates cut both ways here. Higher yields can shrink settlement liabilities, but they also pull bond values down and push borrowing costs up. Falling yields can make your exit position worse if liabilities grow faster than assets. Insurer spreads and participant elections add more uncertainty on top of that. You have to look at assets and liabilities together.
Putting both paths on equal footing
A credible comparison projects both strategies over the same period:
- Finance the termination. Include loan principal and interest, any fees paid separately, and any sponsor cash needed through settlement. If costs are rolled into the loan, count them through the repayments.
- Continue the plan. Project contributions, benefit payments and adjustments, investment returns, expenses and what it will eventually take to settle. Remember that contributions cost the company cash, but they also build plan assets.
Then bring both paths back to the same date and compare present values, using discount assumptions that fit the timing and risk of each. Reflect the company's tax position, including when deductions can be taken and any limits on them. At the end of the comparison period, account for whatever debt is left and for either the remaining settlement shortfall or any recoverable surplus, after taxes and the restrictions on getting surplus back. And count trust expenses only once, through the asset projection.
Loan length matters too. A longer term can make annual cash flow easier but adds total interest, so look at the payment profile and your liquidity needs alongside the present value.
Finally, stress test it. Strong investment returns could favor waiting. Weaker returns, bad rate moves, longer lifetimes or higher expenses make waiting more expensive. The decision should rest on both the expected outcome and a realistic range around it.
What changes once you're out
Once benefits are properly settled through lump sums and irrevocable annuity purchases, the investment, interest rate and longevity risk on those obligations is no longer yours. The ongoing plan expenses stop once the wind-down is complete. [4]
What you're left with is a fixed-rate, fully amortizing loan with scheduled payments and a payoff date. I don't want to oversell that part. The loan is still a corporate obligation and it uses borrowing capacity. Debt covenants, liquidity and any settlement accounting effects all belong in the decision.
One more thing that trips people up: taking out the loan doesn't lock in your annuity price. Only an executed pricing arrangement with the insurer does that. And for ERISA-covered plans, choosing the annuity provider is still a fiduciary decision subject to the Department of Labor's Interpretive Bulletin 95-1. [5]
A borrowing rate that sounds expensive can still be the right financial call once you measure the full cost of waiting.
At Quantum, we connect current settlement pricing with funding projections and the financing analysis, so you can see both paths side by side. Before you commit to more years of contributions and expenses, find out what your breakeven borrowing rate is and what getting all the way out could save you.
References
1. IRS funding segment rate methodology and tables