Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Use Interest Rate Swaps to Lock in Lump Sum Benefit
Mechanics of a rate lock
Lump sum election date
• SERP Participant agrees to have lump sum calculated using fixed
interest rate on determination date
• In order to create more certainty to the lump sum amount
today, individual will separately enter into a rate lock hedge
position with JPMorgan to lock-in a specific interest rate level
• This position will create an offsetting gain if rates increase and
a loss if rates decrease
Lump sum determination date
• SERP participant will unwind the rate lock coincidental with the
lump sum calculation
• Rate lock settlement amount JPMorgan receives or pays will be
determined by prevailing rates on that date
• If rates have risen, the Participant will receive an unwind
payment that will increase the lower lump sum
• SERP administrator will make a single payment to the
Participant reflecting the settlement value of the hedge
The rate lock will offset any changes in the lump sum
At inception – election date
Rates increase
Positive
value
Negative
value
T-lock is worth
more (“in-themoney”)
Plan lump sum
decreases in
value
JPMorgan
Rate lock agreement
SERP
Participant
Unwind – determination date
Rates decrease
Positive
value
Plan lump sum
increases in
value
SERP
Administrator
Net lump sum payment
adjusted for hedge gain or
loss
SERP
Participant
CONFIDENTIAL
Negative
value
T-lock is worth
less (“out-ofthe-money”)
Hedge gain
or loss
JPMorgan
Note: This materials is presented for educational purposes only and may not be forwarded or otherwise distributed, in part or total,
without the permission of J.P. Morgan
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