Traditional Pension being frozen by megacorp

[murg]

Hello board! My megacorp has announced they are freezing our traditonal pension next year. That spurred me to start doing some research and led me to this facinating board.

I am 51 and have worked for 21 years at my company. Our traditional pension formula was 2% X years of service(max 25yrs) X avg of 5 high years. Basically you counted on 50% of your pay at retirement coming from your pension, and normal retirement is age 60 so you recieved the full pension at age 60. Our 401K has always had a 50% match of first $1000 contributed, which was crummy but the pension was good.

Back in 2003 we were offered the choice of staying in the traditional plan or switching to the cash balance plan, I chose to stay in the traditional plan because of length of service and the fact that the traditional plan was fully funded and the company is in excellent financial shape. Now they have annouced because of the Pension Reform Act of 2006 they were being forced to freeze the traditional pension plan and beginning next year everyone would go to the cash balance plan.

The company will contribute 8% of my salary until I retire to this plan with an additonal 3.6% the first 5 years as a transition credit. The cash balance plan pays T-bill rate +1% which has been 5% APR compounded quarterly. In addition they will up the 401K match to 3.5% of my salary.

They have not provided me with a pension calculator for this cash balance plan yet so I really don't have a good handle on what has just been done to me. The internet is flush with articles on how long term older employees are being hurt badly by these changes. It appears to me that while it will cost me a modest amount, it is not devastating. Am I right?

 

[saluki9]

Sounds like you still have a very good benefit (One that I would be jealous of anyway)

Give us the expected benefit under the old plan and what you will be getting in the cash balance plan and surely somebody here will run the numbers for you.

 

[ScaredtoQuit]

What you should be concerned with is how they will convert the value of your pension under the defined benefit method to the value under the defined contribution method. If you looked at a graph of a typical defined benefit plan, where the y axis is value and the x axis is time, it would meander along the bottom with a very, very slight slope. Then at some age (usually 55) when you become of retirement age, the value spikes almost straight up. The problem with these types of plans is that before you reach retirement age, the theoretical, legal value of your pension is usually a pittance.

Soooo, that leaves the question of how will they convert a value that was just four years away from peaking? I don't know how your company will handle it. My company had a similar conversion in 1987. At that time, I had ten years of service and a salary of about $65K. When they converted my time, and made a cash contribution to the new defined contribution plan, the value for all that time was only about $17K. Fortunately for me, they gave existing employees the option of continuing to compute their benefits under the old defined benefit plan or the new defined contribution plan. Today, as I prepare to take the plunge into retirement, my defined benefit calculation is about $700K while my defined contribution calculation is only about $250K. Obviously, I am sticking with the old method.

It seems to me that Companies who are making such a conversion should give special consideration to those who are on the verge of peaking. Even though their theoretical pension liability for someone like you might not be very high, it seems to me that they have a moral liability to lower your pain. I am afraid that at this point you are totally dependent on their good will. Good luck on the outcome.

 

[Texas Proud]

Check to see if they are keeping your old plan, just frozen (which by law they must allow you to keep)...

The way you can be screwed if if they say they are converting you over to the cash balance plan and then adding the 8 plus %... you would have a balance, but it would more than likely NOT be as much as your frozen plan with no new credits... but, you get the higher of the two when you retire...

But, if they are freezing.. then they have not fully funded the plan... that is the main reason the new law hurts companies...

 

[murg]

Thanks for your input on my post. I spent the last 21 years on autopilot. My megacorp said they would replace 50% of my salary with the pension, 25% would come from SS, and I should save enough in the 401K to provide the other 25% so that’s what I did.

According to the material provided to us so far they are freezing the pension not converting it. In my case my high 5 years will average $7.5k per month and I will have 22 years. So my pension will freeze at 44% of $7.5k and will not increase no matter how long I continue to work at megacorp.

Effective next year they will start contributing 8% of my salary plus the 3.6% for 5 years to the defined contribution plan. That will continue until I retire and then I will receive that money in addition to the defined benefit plan money.

If this is the case would that mean they are doing the right thing?

One aspect that many employees are concerned about is the transition credits. You have to be 40 years of age at the time of the freeze to receive them, if you are you will receive them until you reach 25 years of service. They start at 2% and gradually go up to 5% per year. One person I work with will be 39 and will not receive any of the transition credits, another will be 40 and will get them for 16 years.. It is hard to understand such an arbitrary cutoff.

 

[ziggy29]

You have to be 40 years of age at the time of the freeze to receive them, if you are you will receive them until you reach 25 years of service.

Another screw job for the younger generation. What else is new? If this keeps up we're going to eventually have full-fledged intergenerational warfare.

 

[MasterBlaster]

The example from Scared_to_quit is typical of what I have seen from defined benefit conversions to cash balance plans.

Note that from his example you would only get maybe 40 percent of what you thought you would.

So you are basically screwed, The promise was not kept.

 

[saluki9]

If this keeps up we're going to eventually have full-fledged intergenerational warfare.

Wait about 15 years and see what your payroll taxes are going to be. Then we can talk about warfare.

 

[ziggy29]

Wait about 15 years and see what your payroll taxes are going to be. Then we can talk about warfare.

I'll be retired in 15 years, most likely, so my payroll taxes would be zero. Of course, in 15 years I'll be the target of a revolt as an older citizen just as I've had one the last decade as a younger one.

I predict young people will finally openly rebel at the continued intergenerational wealth transfer right about the time I'm going to be on the receiving end of the transfer.

 

[Rich_by_the_Bay]

I predict young people will finally openly rebel at the continued intergenerational wealth transfer right about the time I'm going to be on the receiving end of the transfer.

Inheritance might serve to temper their responses. Many of us will be sitting on a million or two (or more) by then. If it were me, I'd treat my elders real nice.

 

[teejayevans]

According to the material provided to us so far they are freezing the pension not converting it. In my case my high 5 years will average $7.5k per month and I will have 22 years. So my pension will freeze at 44% of $7.5k and will not increase no matter how long I continue to work at megacorp.

Effective next year they will start contributing 8% of my salary plus the 3.6% for 5 years to the defined contribution plan. That will continue until I retire and then I will receive that money in addition to the defined benefit plan money.

If this is the case would that mean they are doing the right thing?

Your megacorp is infinitely better than my megacorp (hint, we sued our
company because of pension changes), if I was in your place, I'd be
very thankful! With more years and higher pay, my pension estimate is
600 per month, and no 8% either...
Tom

 

[ats5g]

Thanks for your input on my post. I spent the last 21 years on autopilot. My megacorp said they would replace 50% of my salary with the pension, 25% would come from SS, and I should save enough in the 401K to provide the other 25% so that’s what I did.

According to the material provided to us so far they are freezing the pension not converting it. In my case my high 5 years will average $7.5k per month and I will have 22 years. So my pension will freeze at 44% of $7.5k and will not increase no matter how long I continue to work at megacorp.

Effective next year they will start contributing 8% of my salary plus the 3.6% for 5 years to the defined contribution plan. That will continue until I retire and then I will receive that money in addition to the defined benefit plan money.

If this is the case would that mean they are doing the right thing?

One aspect that many employees are concerned about is the transition credits. You have to be 40 years of age at the time of the freeze to receive them, if you are you will receive them until you reach 25 years of service. They start at 2% and gradually go up to 5% per year. One person I work with will be 39 and will not receive any of the transition credits, another will be 40 and will get them for 16 years.. It is hard to understand such an arbitrary cutoff.

murg,

If I read all this correctly, with the frozen benefit you'll be getting $3,300/month [for 22 years of services] instead of $3,750/month [capped at 25 years of service]. I guess you can just:

1) Calculate the lump sum needed to buy $450 of a single life annuity at http://www.immediateannuities.com/;

and then,

2) project what the cash balance is at various ages to figure out how long it will take to generate this lump sum.

- Alec

 

[Texas Proud]

murg,

If I read all this correctly, with the frozen benefit you'll be getting $3,300/month [for 22 years of services] instead of $3,750/month [capped at 25 years of service]. I guess you can just:

1) Calculate the lump sum needed to buy $450 of a single life annuity at http://www.immediateannuities.com/;

and then,

2) project what the cash balance is at various ages to figure out how long it will take to generate this lump sum.

- Alec

Close, but not all in... you would assume he would get a higher 5 year average if he kept working... so maybe it is $500 or $550 he might need to use.. Only he knows how much he could get in raises.. or extra pay if it was available..

 

[HFWR]

"My" megacorp switched to the cash contribution scheme plan back in the mid-90s. Since I had 15 yrs service, and was about 44-45 at the time, I chose to stay on the old plan. Lo and behold, they solved that issue by laying me off...

After 15 yrs, my pension was worth around $22k cash value, so I took the money, sans the penalty and taxes, and ran.

Rehired on the new plan, which involves a 2% contribution, plus a 4% match up to 4%. Granted, losing the estimated $250k pension sucked big time, even more so now that I'm being ****-canned downsized again, and am being bridged to 55yo, right when the DBP would have made the big jump upward...

However, for the much younger folks, not in the limbo years of say 40-50 something, the 401k match system works much better than a DBP, since you get the cash in your account, and can take it with you, no strings attached. After all, it's appears to me that many, if not most, careers will not be of the 30yr-with-the-same-company variety...

 

[murg]

Well I am feeling better. Most of the info on these type of transistions that I have found involved horror stories like HFWR's, so I assumed the worst.

ats5g and TexasProud- I have averaged a 3.5%pay raise the last 10 years and have done the calculations you suggest. I will need to work approximately 10 years to amass enough in the dbp to buy an annuity to make up for the frozen benefit in the dcp. Assuming I am not missing some other variable I think I will be ok.

Thanks, Murg

 

[ats5g]

murg,

did you add in the additional 401(k) match as well?

- Alec

 

[murg]

ats5g - yes i included the additional match that the corp will put in my 401K