Ford to offer retirement buyout

[Chuckanut]

NPR had a story today about Ford Motor Co offering to buy out its current retirees. The idea is that Fod will pay the retiree a lump sum in exchange for eliminating the retiree's pension obligation. The story made a point that this won't save Ford much money, but it will get a huge obligation off of their books. That will result in a better credit rating. Presumably, this is the payoff.

https://www.npr.org/2012/05/16/152809399/certain-ford-retirees-face-major-pension-decision

 

[ziggy29]

Wall Street and the credit rating agencies hate uncertainty. Pension obligation questions add uncertainty. It'll be interesting to see how many take them up on the offer. My guess is that it won't be very many.

 

[rescueme]

My guess is that it won't be very many.

Don't be too sure ...

I retired from a "speciality vehicle manufacturer" with close to 30 years, represented by the UAW for the assembly jobs. (I was white-collar, non-management, BTW).

When we had a similar program (back in the '80's) we had a lot of union folks that went for the lump sum, and retired with substantial amounts.

I still remember the one guy that pulled up to the office on his last day, in a white streach limo (at the age of 40+).

I very much doubt that he has a driver today (of course, I could be wrong).

Immediate gratification over long term "possibilities"? What do you think most folks (other than on this forum) would opt for?

 

[2B]

My guess is that it won't be very many.

I disagree but it will definitely depend on how they value the buyout. However, anyone with serious health issues and many (misguided) people with money issues will look upon this as an absolute windfall.

The article in the OP had absolutely no details.

 

[Independent]

This is a longer article, but still no numbers Ford's Pension Buy Out: Great Idea or Sucker's Bet? - Forbes

Note that it's only for people currently getting retirement benefits. I'd say it's just like the many companies that offer a lump sum or an annuity at retirement, maybe Ford never did that.

I think the Forbes article is correct, Ford just doesn't want the uncertainty of whether their retirement fund can really hit it's assumed investment return. Move that risk to the employees.

I wonder what factor they used for anti-selection (the notion that retirees in poor health will take the lump sum, while those who feel great will keep the annuity).

 

[ziggy29]

I disagree but it will definitely depend on how they value the buyout. However, anyone with serious health issues and many (misguided) people with money issues will look upon this as an absolute windfall.

Could be. If Ford sets the buyout value according to what it would take to buy an SPIA with the same income stream today, using current interest rates, I could see more people taking it. But if they are going to undervalue the income stream using interest rates that are too high for current reality, it would be a bad deal.

In other words, if I were a Ford pensioner and if it would cost $300K to buy an SPIA at current rates giving me the same income stream, would they pay anywhere near $300K? Or are they using interest rates for setting the lump sum that don't bear reality to today's market (thus lowballing the lump sum)?

I guess the only other consideration might be that taking the lump sum protects you from the possibility of future default or bankruptcy.

For years, I've been expecting that once I become pension-eligible with my previous Megacorp's frozen pension, they may offer me a buyout. No way to know that will happen, but if it does it would likely happen as I approach 55 as that's the earliest I can tap what few crumbs will be coming my way.

 

[Chuckanut]

The most interesting comment in the NPR story was one retiree's comment that it would take about $1,000,000 to get him excited about the offer. He needs his 'socks knocked off."

 

[Gearhead Jim]

I worked for United Airlines for 36 years, and all that time I would have been happy to get my future pension as a lump sum, even a reduced lump. I could see where the company was eventually headed, and (bragging) was one of the few to predict, decades in advance, what could happen to our pensions.

Of course, individual discipline and financial wisdom are required, but the wisdom can be had right here for free.

My individual case worked out reasonably well, but many others did not.

Take the money and run.

 

[veremchuka]

I wonder if the buy out would eliminate their medical benefits? A lump sum may be attractive to those of us here because we can handle money responsibly but if the medical benefits were eliminated that would scare me off. I know Medicare is supposed to be there at 65 but I doubt it is better than what I have now, not that it is phenomenal but it is good in my opinion. My retiree medical will be secondary to Medicare, I wish I could opt out of Medicare and just keep my retiree medical, the cost is very reasonable and Medicare sounds like it will get quite expensive about the time I'll qualify. Then I'll have to pay for 2 sets, I'd want my mega corp as a backup.

 

[rodi]

Having finished reading "Retirement Heist", I would definitely do some math on the lump sum benefit to see if it's a good deal or a rip off.

My frozen pension has an underfunded lump sum benefit. (Can only get 1/2 the lump sum, the rest is an annuity). The math works much better if you take the annuity vs the 1/2 lump sum and 1/2 annuity. I've run it through multiple calculators that use a variety of actuarial tables. I'll be pulling the trigger on this in a few years, and will run the math again before making my decision.

 

[travelover]

I'm potentially on the receiving end of this. No significant details have been leaked out re continuation of health care benefits, equivalency to the cost of a SPIA, tax consequences, etc, so it is all speculation right now.

The upside would be to cut the tie to the mothership, so that if she goes down the pension doesn't sink with her. The PBGC payout does not cover the supplement that I get between retirement and SS eligibility nor does it cover the full amount of my pension based on my age - nor health care benefits, for that matter.

Initial details will roll out in August as the first randomly chosen group gets their details and starts to work through the decision process. I guess that it is possible that Ford is trolling for fools that want a lump sum to pi$$ away or the few in a position to know they would do better with a lump sum (likely to die soon), but that has to be a small number. The affected group is retired salaried employees, which is primarily made up of engineers.

 

[ziggy29]

I wonder how things would have turned out if they offered a "partial buyout" option where people whose pensions exceed PBGC guarantees could receive a partial lump sum and have their pension reduced to be within PBGC limits. I suspect this would make it more attractive to some folks.

And the more I think about it, the more this move has the potential to backfire if it's only the sicker folks and the ones who are already dying who take it, and Ford is left with all the healthy folks collecting for many more years.

 

[travelover]

. No significant details have been leaked out re continuation of health care benefits, equivalency to the cost of a SPIA, tax consequences, etc, so it is all speculation right now......

UPDATE: Someone here slipped me some details.

LJPR | Financial Advisor | Estate Planning | Retirement Planning

 

[ziggy29]

Looking at the white paper above, they are estimating the "interest rate" used to calculate the lump sum to be 4.25%. That seems pretty generous in today's environment.

One example I noticed in the article:

Mike and Tonya are both 56. Mike has retired from Ford and is offered a $700,000 lump sum on his pension. Tonya is an executive at another company and makes $200,000 a year, which is adequate to maintain their life style. Tonya intends to work until age 66.

Mike couldn't have done much better with a winning lottery ticket in his hand. Some guys have all the luck!

 

[Gearhead Jim]

I wonder how things would have turned out if they offered a "partial buyout" option where people whose pensions exceed PBGC guarantees could receive a partial lump sum and have their pension reduced to be within PBGC limits. I suspect this would make it more attractive to some folks.
...

We must remember that the primary mission of the Pension Benefits Guarantee Corporation, is to Guarantee that they never pay any Pension Benefits to anyone.

Seriously, the arcane formulas and penalties they apply when calculating your pension are amazing. My pension was taken over by the PBGC just six months before my mandatory retirement, and my "calculated benefit" ended up being something like 30% of the original benefit. The guarantee was even lower. Fortunately, there was enough money in the plan to pay much more than the guarantee, plus a non-PBGC side deal that helped some of us a lot.

But my point is, the PBGC may well reduce your payout because of the partial lump sum, even in the situation you describe. I would not trust any advice to the contary unless it had been through an actual plan termination and possible court fight. Your idea might still turn out to be a good deal, but use caution.

 

[JOHNNIE36]

Just received an email from mega-mega Motors that they, like Ford, are changing their retirement program. It only concerns salaried retirees and covers those that retired after 10-1-97 and before 12-1-11. Being offered are three options: continue as you are, lump sum distribution or a new monthly payment based on that lump sum valuation. Once all this shakes out, the Salaried Retirement Program as it is now (for retirees in that time frame) will be eliminated.

Looks like this is just the start of things to come. I know that new hires do not have a defined banefit plan. In that email, no other details were provided, such as what happens to the benefit for a surviving spose? Salaried health care was eliminated in 2008 and replaced by a $300/mo additional payment in your monthly retirement.

Guess I don't understand the option #1 of just continuing as you are. Once a change like this is started it will just continue until mega-mega Motors gets where they want to be.

 

[Achiever51]

Continuing as before is likely a roll of the dice. Should GM decide to drop its current pension plan entirely, would those choosing option 1 now be at the mercy of the PBGC?

 

[samclem]

Looking at the white paper above, they are estimating the "interest rate" used to calculate the lump sum to be 4.25%. That seems pretty generous in today's environment.

Yes, it does, but I don't think it's unreasonable. Does anybody think we'll be at the present rates over the next 30 years? Ford white collar workers inclined to turn down the lump-sum should take a hard look at what happened to Delco management types--they took a real beating. And union retirees who may believe they should stick with the present arrangement should also weigh the fact that they might not have the political "top cover" they had in the past when the next round of belt-tightening hits.
Lots of choices out there.

 

[ERD50]

Continuing as before is likely a roll of the dice. Should GM decide to drop its current pension plan entirely, would those choosing option 1 now be at the mercy of the PBGC?

As I understand it, they can't just decide to 'drop it' and have the PGBC 'pick it up'. You have to essentially go into bankruptcy and show that you can't pay the pensions. But the PGBC monitors the situation, and can (and does) ask for more money to be put into the fund.

And unless the PGBC goes bankrupt, there is no 'mercy', just a set of rules. Everyone below a certain (fairly high) cap gets 100%.

Of course, as we have seen recently, the rules get twisted for 'special cases'. I won't go further, it gets too political.


-ERD50

 

[JOHNNIE36]

Even I get concerned when s**t like this happens. You never know what is coming down the pike. Think I would be fairly safe at my age. Maybe they would take it easy on me. Age has to be a factor. Don't think they would come in and screw around with someone in their 70's. I had what at the time were considered the magic numbers, age plus length of service equals 85 points. I was 51.7 years of age and had 33.4 years of service. I'm not sure there is any kind of safety net.

 

[ziggy29]

I had what at the time were considered the magic numbers, age plus length of service equals 85 points.

You never know. When I was hired into my first Megacorp job with a pension plan, they also had an "85 point" retirement plan using the same formula, where if you had the 85 points you received the full retirement benefit that wouldn't be reduced because of early retirement (though you had to be at least 55 in all cases).

In the space of less than two years in the 1996-98 time frame, they first eliminated 85 point retirement (for new hires and current employees under 50), then they eliminated retiree health insurance (again for new hires and current employees under 50), and finally froze the pension (yet again for new hires and current employees under 50).

At the time they froze pensions I had 11+ years of service so I was vested into a puny pension (something like $650 a month at age 65 in 2030) but as times get more dire I think they might have to pick more than low-hanging fruit in the future. Still, I doubt they'd come after current retirees; that seems like a third rail few want to touch.

 

[Ken11]

Doesnt the ERISA statute require the pension to be converted to a lump sum using a governmtnt published set of interest rates? That how my mega corp calculation was done.

The calculation also involves your age ( since longevity factors into the lump sum required).

The lower the rate the higher the lump sum. Sinking rates may give you an opportunity to wait until next year to take a larger sum. Thats where I'm at.

 

[JOHNNIE36]

Doesnt the ERISA statute require the pension to be converted to a lump sum using a governmtnt published set of interest rates? That how my mega corp calculation was done.

The calculation also involves your age ( since longevity factors into the lump sum required).

The lower the rate the higher the lump sum. Sinking rates may give you an opportunity to wait until next year to take a larger sum. Thats where I'm at.

I think a lot of people would lean toward the lump sum. Kind of like a "bird in the hand....." I was thinking about what kind of lump sum I would be offered based on my age (76). Probably not much. And, my big concern is what kind of security does that provide for DW? Right now she would get about 50% of my pension if I go before her. Does that provision go away?

 

[JOHNNIE36]

Received a letter today from GM clarifying the email I got last week about the salaried retirement program. In a nut shell, the letter said that retirement program for salaried people is no more. Done, over, kaput. For those that retired prior to 10-1-97, the benefits remain the same, except it will be administered by Prudential. I was happy to see that survivor benefits remain intact.

This takes a big load off the shoulders of GM concerning future obligations. I went to Google and learned a lot more about the details. For me, I think I'm better off. I think there is less chance of Prudential going under than GM. Maybe I'll avoid the PBGT after all. That just cut my last tie to GM. After 34.5 years, they owe me nothing and I owe them nothing. My fraternity mug from General Motors Institute (1959) still sits on my desk accummulating pens and pencils. I guess that's my last tie. Can't get rid of that. Too many memories of days gone by and of fraternity brothers.