former employer is offering a pension buy out

[keegs]

Got something in the mail on Saturday from a former employer offering a pension buy out. It was just a notification of the intent to make an offer. I'll have to exercise it in February 2014.

Since it's my only source of guaranteed income aside from SS, I'm inclined to decline. (DW has a DB pension as well as SS)

Without any more details .any advise?

 

[pb4uski]

I would lean to decline unless the proceeds were sufficient to buy a SPIA with an equivalent monthly benefit from a financially stable insurer unless I was uncomfortable with the financial worthiness of the pension plan (funding) and/or the sponsor (former employer).

 

[2B]

I'm surprised you just received this. I received one a little over a year ago from a former employer and it was really low. It was only about 2/3 of what it would take to buy an equivalent annuity. So despite my general disgust of anything resembling an annuity, it was clearly financially better to keep the pension.

I believe that at the beginning of 2013 the interest rate that companies must use in calculating buy outs was lowered which means the amount of your offer may be more realistic. My former employer was clearly trying to get in under the wire with the higher interest rate.

 

[ziggy29]

I had one of these a while back from my first Megacorp -- an offer to buy out my puny future pension that I accrued before they froze it.

At the time I received the offer, I was 46. My pension calls for about $650 a month, no COLA, starting at age 65 (in 2030). They offered something like $23,000 as a lump sum buyout. I didn't think the math worked all that well to accept the buyout (they had to assume interest rates that were not reflective of the current market), and the other factor (as you cited) is that we have decent retirement income waiting for us in SS and retirement savings, but this is the only DB pension component we'll have coming. So I decided we'd stick with a three legged stool, even if it wobbles because one of the legs is very short.

 

[Jack_Pine]

DW and I worked for the same company for some time and received the offered buyout of pension a year ago. It was very low. We decided to decline. It amounts to around $1,500/month for the both of us so not huge, but a nice base to work off of.

 

[MichaelB]

I had one of these a while back from my first Megacorp -- an offer to buy out my puny future pension that I accrued before they froze it.

At the time I received the offer, I was 46. My pension calls for about $650 a month, no COLA, starting at age 65 (in 2030). They offered something like $23,000 as a lump sum buyout. I didn't think the math worked all that well to accept the buyout (they had to assume interest rates that were not reflective of the current market), and the other factor (as you cited) is that we have decent retirement income waiting for us in SS and retirement savings, but this is the only DB pension component we'll have coming. So I decided we'd stick with a three legged stool, even if it wobbles because one of the legs is very short.

My mother has a couple of small pensions like that from jobs one of them worked at for a few years, long ago. They may not be much but they sure add up.

 

[Midpack]

I believe that at the beginning of 2013 the interest rate that companies must use in calculating buy outs was lowered which means the amount of your offer may be more realistic. My former employer was clearly trying to get in under the wire with the higher interest rate.

GATT and PBGC rates are commonly used, and you can readily find them along with history online. But the rates companies use for private pensions can vary, so you have to ask your employer exactly what they use. My former employer used both, and was in the process of changing the weighting then used over several years, to their benefit as expected. Former employer recalculated the rates monthly too, it may not be a "beginning of the year" phenomena.

http://www.pensionanalysis.com/CM/MethodsStandards/Interest-Rate-Standards.html

 

[bizlady]

I would consider the health of the fund before making a decision in addition to the amount.

 

[Chuckanut]

Your pension, or at least part of it, is guaranteed by the Feds. If you use the buy out to purchase an annuity, who guarantees the annuity?

 

[brett]

A DB pension buyout will typically be less than the cost of an annuity with similar characteristics.

The reason for this is that people who have health problems, people who do not have longevity in their family tree are reluctant to buy annuities.

People who expect to live long and healthy lives are more inclined to buy annuities. DB plans also do not take into account sex of the recipient. Women live longer than men.


So, the basic math is that the expected lifespan of a DB recipient is lower than the expected lifespan of someone who purchases an annuity. Hence, the DB planholder has a lower commuted value.

 

[growing_older]

I think these are usually offered when the company WANTS you to take the buyout, so it's worth evaluating carefully if the amount offered adequately compensates for giving up the future pension income stream. Mine never were.

 

[Running_Man]

I'm surprised you just received this. I received one a little over a year ago from a former employer and it was really low. It was only about 2/3 of what it would take to buy an equivalent annuity. So despite my general disgust of anything resembling an annuity, it was clearly financially better to keep the pension.

I believe that at the beginning of 2013 the interest rate that companies must use in calculating buy outs was lowered which means the amount of your offer may be more realistic. My former employer was clearly trying to get in under the wire with the higher interest rate.

If you are given the option of either keeping your pension or accepting a buyout I do not believe there is any limit on what a company has to offerin a buyout.

 

[brett]

Last year one of the automobile manufacturers offered pension buyouts even to those who were already retired and drawing a pension.

There was a reason that it was only offered to office and management and not to hourly workers. In a word, longevity. The management office workers had a lower mortality rate thus the company could save more by offering them a buyout.

It is all down to math and actuarial tables. No magic.

 

[pb4uski]

Your pension, or at least part of it, is guaranteed by the Feds. If you use the buy out to purchase an annuity, who guarantees the annuity?

At the end of the day, it is the other insurance companies who cover it via guaranty fund assessments. However, given the highly regulated nature of the insurance companies and the very low financial issues since regulatory reforms were put in place in the later 1990s, including the recent financial crisis where there were no major insurer failures (and many bank failures) the risk is very low.

I have no doubt that the pension risk far exceeds the risk associated with any annuity contract. The funding of annuities is much stronger than pensions (100%+ capital vs 80% or less) and insurers are much more regulated than pension plans.

 

[GrayHare]

What are the tax considerations? Are lump sum buyouts taxed as ordinary income?

 

[Spanky]

What are the tax considerations? Are lump sum buyouts taxed as ordinary income?

Normally, you would roll it over to a tax deferred account (e.g., 401K, IRA).

 

[Coffee Mavin]

Your pension, or at least part of it, is guaranteed by the Feds. If you use the buy out to purchase an annuity, who guarantees the annuity?

All pensions are not insured. The pension Summary Plan Document will tell you if it is insured. If it is insured it may not be at 100% and typically not insured at all for early retirement.

If a company files bankruptcy, the courts can direct restructuring of the pension.

I would consider carefully how financially stable the company is in addition to what the buyout figure is before making a decision. I have one company I worked for that has been sold a few times & gets wobblier every time. They have also changed the terms and formulas for benefit several times since I left (including eliminating non-spouse beneficiary option). I WISH that they would make a buy out offer because I would take it. I don't trust that pension to be fully funded or intact or reachable by the time I retire. I would much prefer to be managing that money in my own 401K!!

 

[ziggy29]

Last year one of the automobile manufacturers offered pension buyouts even to those who were already retired and drawing a pension.

There was a reason that it was only offered to office and management and not to hourly workers. In a word, longevity. The management office workers had a lower mortality rate thus the company could save more by offering them a buyout.

I would have assumed it had something to do with collective bargaining agreements that covered the hourly workers but not the management or white collar staff.

 

[keegs]

Thanks for all the input folks. Lots of good info. I'm in good health as is the DW. I'm leaning toward just leaving things as they are.

The research company I worked for was purchased by an international leader in telecom equipment manufacturing and services about 3 or 4 years ago. This company took responsibility for pensions with the purchase. They say they're looking to shrink the size to their obligation and reduce pension admin costs. They set up a website with some information about the payout options and a link to the company pension benefits website. They're offering a choice of a lump sum or an annuity (single or w/survivor benefits ...that can start immediately or at a later date). I think I'll have to call them for the LS payout amount as I only see some general information about how the payout is calculated. The pension description document indicates that the plan is insured by PBGC... My DB benefit is pretty small ..just under $650. p/mo....but hey...that might be healthcare insurance until Medicare comes into the picture.

Thanks again.

 

[Midpack]

I have no doubt that the pension risk far exceeds the risk associated with any annuity contract. The funding of annuities is much stronger than pensions (100%+ capital vs 80% or less) and insurers are much more regulated than pension plans.

Probably true, but...

No idea how common it is, but the "pension" offered by my former Megacorp WAS an annuity contract. Had I not taken a lump sum, they would have simply bought a SPIA on my behalf. Megacorp's obligation to me ended the day I retired whether I took a lump sum or a "pension" and my risk was the same as any annuity I might have bought myself. Again, not sure how common this is, but might be worth asking (I'd want to know before making a decision).

 

[nun]

Got something in the mail on Saturday from a former employer offering a pension buy out. It was just a notification of the intent to make an offer. I'll have to exercise it in February 2014.

My employer just offered me the opposite.....a pension buy in. They are going to send details soon, but the administrator told me that it looks like they'll compound all the contributions to my defined contribution plan by 8.5% a year to come up with the amount I'll have to pay to get into the defined benefit plan........my rough estimate is that will be around $270k.......but the first $13k is COLA'ed and I'll qualify for $20k/year at age 55.

 

[Chuckanut]

I would much prefer to be managing that money in my own 401K!!

If I could do it again, and if they would let me do it, I would opt for getting all my retirement benefits in cash, put them into a tax advantaged account, and control it myself.

Others are correct. The value of a pension also depends on its funding and the intent of the providers to not find a way to wiggle out of it. Lately, even the Feds are wiggling, as demonstrated by the changes to military pensions. I am not saying they were not justified, just that they were changed.

 

[keegs]

My employer just offered me the opposite.....a pension buy in. They are going to send details soon, but the administrator told me that it looks like they'll compound all the contributions to my defined contribution plan by 8.5% a year to come up with the amount I'll have to pay to get into the defined benefit plan........my rough estimate is that will be around $270k.......but the first $13k is COLA'ed and I'll qualify for $20k/year at age 55.

I don't think I've every heard of this before. It would be nice if it were to become a trend.

 

[pb4uski]

Probably true, but...

No idea how common it is, but the "pension" offered by my former Megacorp WAS an annuity contract. Had I not taken a lump sum, they would have simply bought a SPIA on my behalf. Megacorp's obligation to me ended the day I retired whether I took a lump sum or a "pension" and my risk was the same as any annuity I might have bought myself. Again, not sure how common this is, but might be worth asking (I'd want to know before making a decision).

I don't think it is very common, but I have seen it. Are you both the owner and beneficiary of the annuity or is the pension plan the owner and you the beneficiary?

If the you are the owner then I presume that your IRA "owns" the annuity so the net effect was as if you took the lump sum and bought an annuity or they bought the annuity and the transferred the annuity to your IRA as an in-kind distribution that relieved the plan of their obligation to you.

If the plan is the owner then I would think that technically the plan is still obligated if the insurer and guaranty fund were to be unable to make the benefit payments. IOW, the fact that the plan owns an annuity that matches their obligation to you does not relieve them of their obligation to you.

 

[Midpack]

I don't think it is very common, but I have seen it. Are you both the owner and beneficiary of the annuity or is the pension plan the owner and you the beneficiary?

If the you are the owner then I presume that your IRA "owns" the annuity so the net effect was as if you took the lump sum and bought an annuity or they bought the annuity and the transferred the annuity to your IRA as an in-kind distribution that relieved the plan of their obligation to you.

If the plan is the owner then I would think that technically the plan is still obligated if the insurer and guaranty fund were to be unable to make the benefit payments. IOW, the fact that the plan owns an annuity that matches their obligation to you does not relieve them of their obligation to you.

Probably TMI, but in my case, when I was faced with the lump sum vs pension question, one of the first things I did was get a quote for what a SPIA would cost that would provide the same monthly $ benefit and joint survivor terms. [Same thing we've all done here under the same circumstances].

The SPIA quote was less than 1% different than the lump sum (former) Megacorp offered (definitely NOT always the case). I asked the Megacorp admin about it, and she volunteered that she was not surprised as they were just buying annuities on behalf of all retirees. Since I took the lump sum, I did not ask all the other (legitimate) questions you've posed.

Again, my point was only that one might want to just ask before making a decision. No downside in asking that I know of.