Pensions, Buyouts, PBGC, RISK

[almost_there]

I am fortunate enough to have a pension that I have been collecting for the last 13 years. The company who is paying the pension has informed us that they will be making a one-time offer to pay a lump sum and buy out our pensions. There is an active discussion concerning this on an email list that former employees (most of whom are collecting a pension) participate. As you might imagine, on the list there is an active discussion of the pros and cons of taking the buyout offer. Most folks view the existence of the government agency that takes over pensions that get into trouble (the PBGC) as a "pro" for keeping the pension since it reduces risk. One person though made this interesting point about the PBGC and its perceived ability to mitigate risk:

"That assumes the PBGC continues its current role. There are many very
aggressive thieves working overtime these days. And the public seems
pretty idiotic - they are getting convinced that pensions are bad and those
that get them are evil, greedy, lazy people and confiscation or reduction
is just fine. So maybe the PBGC will go away. As less and less people
have pensions, there is more and more jealousy toward those who do."

So what do you all think?

Is there jealousy towards people who have pensions?

Is there a real possibility that the PBGC will go away at some point in the foreseeable future and if so to what extent does that make taking a lump sum a better option?

 

[youbet]

Is your pension COLA'd and what is your age? I'd be more concerned about inflation risk than the risk of the PBGC going out of existence anytime soon.


The emotional, subjective jabber about "pension jealousy" makes for spirited Internet discussion group gossip but is hardly where you should be focused in regard to an "annuity or lump sum" decision.

 

[steelyman]

The COLA question is a good one, also if the retiree plan has any provisions for health care ("pension" is such a hot-button word, it's easy to forget cost of insurance. Also, how is the lump sum calculated?

A simple ballpark estimate for the present value of a 30-yr pension with COLA was posted (I believe by Nords, but it makes sense to me) is:

annual pension amount / annual I-bond yield

You can find the divisor at TreasuryDirect.gov, it's currently 1.48%

(if I got that wrong, it's my fault)

 

[almost_there]

The pension is non-COLA. I am 60 and wife is 58. The wife gets 50% of the pension amount if I die first. I do not have the lump-sum offer yet. We were informed last year that it would be offered this year. In the meantime I have been using the below to get some idea what the numbers might look like.

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal

 

[utrecht]

The COLA question is a good one, also if the retiree plan has any provisions for health care ("pension" is such a hot-button word, it's easy to forget cost of insurance. Also, how is the lump sum calculated?

A simple ballpark estimate for the present value of a 30-yr pension with COLA was posted (I believe by Nords, but it makes sense to me) is:

annual pension amount / annual I-bond yield

You can find the divisor at TreasuryDirect.gov, it's currently 1.48%

(if I got that wrong, it's my fault)

So a $40,000 yearly COLA'd pension is worth $2.7 million? That doesn't seem right to me. I'd take the $2.7 million every day of the week.

 

[stepford]

There is certainly plenty of "pension jealousy" out there, but I think the risk of the PBGC going away is minimal. Far more likely, I suspect, is that the phasing out of all pensions that has been going on for a generation will simply continue, and with no new pensions being created existing pensions will just die off with existing pensioners, and with them the need for the PBGC, in another generation or so.

 

[Texas Proud]

The COLA question is a good one, also if the retiree plan has any provisions for health care ("pension" is such a hot-button word, it's easy to forget cost of insurance. Also, how is the lump sum calculated?

A simple ballpark estimate for the present value of a 30-yr pension with COLA was posted (I believe by Nords, but it makes sense to me) is:

annual pension amount / annual I-bond yield

You can find the divisor at TreasuryDirect.gov, it's currently 1.48%

(if I got that wrong, it's my fault)

I think you have your factor wrong.... no way the divisor is an I-bond rate...

Go to immediate annuities and put in the relevant info... it will give you what an insurance company will sell you now... much closer to the real value.... the current payout rate is a bit over 5%.... one at 5.48%....

https://www.immediateannuities.com/

Note: this site is much different than the last time I looked at it... so it might be run by someone else now...

 

[Texas Proud]

To the OP...

I would look at the amount they are willing to pay first... if it is in the ballpark then you can look at other problems.... if they are trying to buy you off cheap then no reason to accept...


I would also want to know the health of the company... if they are pretty strong and the pension is well funded.... that is a plus... if you had a pension from a gvmt entity in Illinois, not so much...

It would be hard to get rid of the PBGC.... it is self funded (supposed to be at least) so no big incentive to close it down... even if politicians wanted, I do not think there are enough to get it done... so to me the risk of pension jealousy closing it down would not enter my calculation.... what would is if my pension was higher than the max that they would pay.... IOW, if they take it over for any reason and I would get a haircut on pmts., then I would use that in my decision.... but it going away.... nope...

 

[steelyman]

I think you have your factor wrong.... no way the divisor is an I-bond rate...

I think the idea is "risk-free" (and I am writing/speaking for myself now, no one else).

 

[Mulligan]

So a $40,000 yearly COLA'd pension is worth $2.7 million? That doesn't seem right to me. I'd take the $2.7 million every day of the week.

My pension is about twice that and I put it through a calculator drawing at age 46 a few years ago and it wasn't worth that even with a 2% cola.


Sent from my iPad using Tapatalk

 

[kaudrey]

As someone who is very close to the issue (since this is an anonymous forum, I won't say more than that), I can provide a few observations.

1) Although many large db plans are frozen or lumping people out, you'd actually be surprised how many new db plans get created each year (albeit small ones).
2) The PBGC, in some form, will be around for a long time. Meaning, the guaranty will be there, regardless of from where. PBGC insurance is like FDIC insurance - it would be very hard to just pull the plug. Now, may something happen with the level of coverage? Sure, it could, but it would be political suicide, so I wouldn't worry about it.
3) the question of whether to take a lump sum vs a pension should be based on the economics and your personal situation (including your willingness and ability to manage a large lump sum wisely over your retirement years). Most people here would probably be fine to manage it themselves; but we are a unique group of people and not representative of the overall population when it comes to financial acumen The risk of keeping the pension in relation to PBGC is if your benefit is larger than the guaranty or you plan to retire early - PBGC cuts the guaranty if you retire before 65.

 

[nun]

The lump sum you are offered will depend on the IRS segmented interest rates and your age, if you know your monthly benefit you can work out the lump sum amount.

I'm doing the opposite....buying into a COLA'ed pension and here are my numbers, they are slightly better than on the open market for a male/single life plan

Age: 54
Pension start age: 55
Annual amount: $19970
COLA: 3%, but only on the first $13k, that base for the COLA has risen an average of $700/year in the past.
Amount to buy in at age 54: $263k

Initial payout rate: 7%
Effective interest rate if I live to age 84: 7.5%

Without a COLA the effective interest rate will never be greater than the payout rate and will only approach the payout rate if you live forever.

If I use the same numbers to get a commercial quote with no COLA I'll get a payout rate of 5.5%, but an implied interest rate of 3.4% if I live to 84. Bottomline, I would not buy an annuity at those rates. Of course the low interest rates will act in your favor if you are cashing out for a lump sum.

 

[steelyman]

Using numbers from my own files (we had a good benefits department that produced annual summaries and projections):

I resigned my position in 2011 but was not eligible for benefits until I actually retired in 2012. Inserting the numbers we were presented with (lump sum distribution was one), the projection for annual annuity if chosen, and the then-current I-bond rate, the lump sum offer came to about 9.11% of the calculation using the I-bond rate as above.

I ended up not choosing a lump sum, but it's anyone's guess whether the pension will continue until they play the exit music.

 

[zesty]

There is a lot of pension envy nowadays. On reddit I've posted about the fact that you can still get jobs with pensions if you know where to look, only to be downvoted by boorish kids saying that it's not possible.

I don't think there's much danger in losing benefits that you're qualified for. There is more risk with counting on being able to get 20 or 30 years of service in a pension only to have that pension frozen long before you plan to retire, thereby reducing your benefit. That's what happened to my grandpa - his pension was frozen when he had 10 years left to work, and as a result he ended up getting about half the monthly pension payment he was counting on.

 

[pb4uski]

So a $40,000 yearly COLA'd pension is worth $2.7 million? That doesn't seem right to me. I'd take the $2.7 million every day of the week.

+1 I seem to recall a rule of thumb that a COLA pension is worth twice what a non-COLA pension would be worth. So assuming a 6% payout rate that $40k non-COLA pension would be worth ~$667K and a COLA pension would be worth ~$1.33 million.

 

[pb4uski]

As someone who is very close to the issue (since this is an anonymous forum, I won't say more than that), I can provide a few observations.

1) Although many large db plans are frozen or lumping people out, you'd actually be surprised how many new db plans get created each year (albeit small ones).
2) The PBGC, in some form, will be around for a long time. Meaning, the guaranty will be there, regardless of from where. PBGC insurance is like FDIC insurance - it would be very hard to just pull the plug. Now, may something happen with the level of coverage? Sure, it could, but it would be political suicide, so I wouldn't worry about it.
3) the question of whether to take a lump sum vs a pension should be based on the economics and your personal situation (including your willingness and ability to manage a large lump sum wisely over your retirement years). Most people here would probably be fine to manage it themselves; but we are a unique group of people and not representative of the overall population when it comes to financial acumen The risk of keeping the pension in relation to PBGC is if your benefit is larger than the guaranty or you plan to retire early - PBGC cuts the guaranty if you retire before 65.

^^^^ good advice ^^^^
look to the economics, not politics. PBGC isn't going anywhere, though I will say I am somewhat skeptical of the quality of the protection given their deficit position and inadequate funding. Any other insurer with their balance sheet would have been closed down long ago.

 

[steelyman]

+1 I seem to recall a rule of thumb that a COLA pension is worth twice what a non-COLA pension would be worth. So assuming a 6% payout rate that $40k non-COLA pension would be worth ~$667K and a COLA pension would be worth ~$1.33 million.

I think the numbers would be similar if you could get I-bonds that yielded 6 and 3 percent respectively.

 

[growing_older]

You need to run the numbers they give you for the buyout to understand if it's better to take the lump sum. In the examples I've seen the lump sum offers tend to be low, perhaps on the assumption that people like to take the bird in hand so they can calculate aggressively and still meet their goals for buyouts. If the dicsussion boards are partly basing the decision on PBGC standing behind the pension, then you should also understand exactly what they are guaranteeing. Pensions taken at early ages have different limits, so if you are an early retiree you could be "guaranteed" less than your full pension.

 

[Big_Hitter]

annual pension amount / annual I-bond yield

You can find the divisor at TreasuryDirect.gov, it's currently 1.48%

- don't think so


that will give you the value of a perpetuity at 1.48%

 

[Big_Hitter]

As someone who is very close to the issue (since this is an anonymous forum, I won't say more than that), I can provide a few observations.

good observations!