Pension plan terminated

[iloveyoga]

Tell me about it. My former Megacorp offered a pension buyout that was roughly half of what it would have cost for an annuity. Likely one of the worse deals I have seen posted on this forum. I stuck with the pension that I started 5 years later. If I could have received at least 90% of annuity value, I would have gone with the lump sum.

As it is, they shut down the pension at the end of 2021 and moved the funding to an annuity for all pension owners. So, instead of being covered fully (in my case) by PBGC, it is covered up to $250K in terms of a replacement annuity should the current insurance company default. For now, that coverage is insufficient to replace my current pension/annuity fully should the worst happen. Sigh.

I worked with DB plans for many years back in the 1980s and 1990s. This above is why I gave the advice I did. If the lump sum amount is reasonable, I would take the lump sum so you do not have to be concerned about the future of the annuity. It's been a while since I thought about it, but usually in a plan termination a single premium annuity is purchased for the pensions, so it is basically an insurance company guarantee.

 

[pb4uski]

And between regulatory reforms that were put in place in the 1990s and insurers retention of capital to keep good credit ratings insolvencies are very rare these days, and where they do happen most often regulators find a stronger insurer to assume the insolvent insurers books of business. And you have state guaranty funds on top of all of that.

 

[Omega]

Tell me about it. My former Megacorp offered a pension buyout that was roughly half of what it would have cost for an annuity. Likely one of the worse deals I have seen posted on this forum. I stuck with the pension that I started 5 years later. If I could have received at least 90% of annuity value, I would have gone with the lump sum.

As it is, they shut down the pension at the end of 2021 and moved the funding to an annuity for all pension owners. So, instead of being covered fully (in my case) by PBGC, it is covered up to $250K in terms of a replacement annuity should the current insurance company default. For now, that coverage is insufficient to replace my current pension/annuity fully should the worst happen. Sigh.

Sorry about your situation. It's so frustrating!

 

[Omega]

Three random thoughts from someone who has gone through similar decisions in the past a few times (I vested in 4 different private pension plans during my career):

1. When comparing your pension verses a private annuity, consider that private annuity payouts are based on the prevailing interest rates at the time the annuity is opened. Very likely, your current offer is also based on current rates and would be locked in at the time you elect it. There is a potential arbitrage available if you wanted an annuity, but not necessarily the current pension. Interest rates are likely to be higher in 8 years. It is possible you could take the lump sum (enhanced by current low interest rates), invest it for 8 years, and then buy a private annuity at a (much) better interest rate later. Important consideration for a fixed annuity without inflation adjustment. This is what I would likely do if I was set on taking an annuity.

2. Probably not likely, but is the lump sum a one time offer ? Some pensions offer open ended lump sum elections. In some cases there is a defined rate of return on the principal held. Not likely, but important to understand all the different pieces.

3. Remember to consider that there is a bond-like aspect to having a pension that can justify changing investment allocations outside of the pension. This is an aspect that you seldom see mentioned by the "invest it yourself for greater returns" crowd on pensions and especially early SS. Say you normally run a 60-40 stock/bond allocation on your retirement savings while covered by a pension. If you take the pension lump sum and invest in the same 60-40 allocation, you have effectively increased your overall equity position risk. Nothing wrong with that, just be aware of it and make appropriate adjustments in your modelling. If 60-40 was "right" for you while covered by a pension, then maybe 50-50 would be an equivalent risk position after adding the lump sum to your portfolio.

Thank you so much for your thoughtful response. You make some very good points. I like the idea of taking the lump now and purchasing an annuity later, if I still wanted to.

I'm not sure if the lump is a one-time offer. The notice regarding the termination mentions several other options, like joint and survivor annuities, but offers no resource to access the details. So frustrating. And the contact person at my company is on vacation all week.

 

[Omega]

I worked with DB plans for many years back in the 1980s and 1990s. This above is why I gave the advice I did. If the lump sum amount is reasonable, I would take the lump sum so you do not have to be concerned about the future of the annuity. It's been a while since I thought about it, but usually in a plan termination a single premium annuity is purchased for the pensions, so it is basically an insurance company guarantee.

Several people mention this. I'm curious if when you were working with DB plans if you experienced a situation where the administrator of a plan went bankrupt and, if so, what the outcome was for the pensioneers.

 

[Fermion]

Inflation is more likely to be in the 5% to 7% range over the next decade instead of 3%

 

[Chuckanut]

I don't know if it's adjusted for inflation.

I would say answering that question is both important and urgent.

 

[brett]

So many factors make it difficult to say. Is it indexed and if so how, ie is there a threshold to the indexing. Is a a multi employer DB (I strongly suspect not) ,i s you DB well funded or will the obligations be assumed by an insurance company.

Do you have a spouse and if so what percentage does she get if you pass away, how is your health and do you have longevity in your family?? Are there benefits included in the DB plan that are of value to you that would otherwise no be included.

Then comes your personality. Will it be easier for you to spend money in retirement IF you have a fixed income arriving every month or are you the type that hates to see a drawdown of equity for post retirement life/activities. How significant is this decision to your overall financial situation.

As to financial. I decided to take the DB pension for a number of reasons that are particular to my situation. I had two forks in the road. The first was when my employer wanted to move us to a DC. I was grandfathered and opted to remain in the DB plan (which proved to be the better option). Then on retirement I had a cash option. But....commuted value (nominal and decreasing) of the DB forms part of the fixed equity portion of our investment allocation review each year.

 

[armor99]

I know this has been asked dozens of times, but I can't help myself! My pension plan has been terminated and I've been offered a one-time, lump sum buyout of $233,256 for my single life annuity of $1593.24/mo starting at age 65. I am 57 with about 600K in other retirement accounts and will collect SS. Would you take the lump or keep the annuity?

This is how I would figure this out. Do the calculation if you took the lump sum today, and figure 7% average growth till you turn 65. Then see how many years would it take after 65 to equal that number? Are they close, is one way better than the other?

 

[ncbill]

Betting the pension is not COLA.

Since in the OP's case the lump sum invested into a SPIA is close to the pension (within 15%) I'd take the lump sum & invest it instead of taking the non-COLA pension.

 

[iloveyoga]

Several people mention this. I'm curious if when you were working with DB plans if you experienced a situation where the administrator of a plan went bankrupt and, if so, what the outcome was for the pensioneers.

Yes. I have and I never forgot it. It was the type of DB plan where the payments were made each month from the pension account, which was not well funded. The company closed down one day (gates were chained) and people did not get their monthly payments as the funds were too low. As the service provider, we were then out of it, because no money to pay. I believe everything was turned over to the PBGC.

Fast forward to 401(k) plans and the same thing happened with a bank we worked with. Bank closed and was sold etc etc but the 401(k) funds were fine and people just had to wait to get their money.

It's been quite a few years for both situations, but I do remember taking the calls from plan members.

 

[rk911]

If my pension plan was being terminated, I would certainly take the lump sum. Usually you can do an IRA or 401(k) rollover. There are government rules on how the lump sum is calculated.

^^^ this. get it under your control ASAP.

 

[RunningBum]

Have you considered your legacy? If it is important to you, then I would suggest you look at a rollover. Typically, a pension stops when you die. No value is left. It could be tomorrow (I hope not) or in 40 years. A rollover will still have something to pass on.

This works both ways. If you live longer than the breakeven, your heirs get more. You can't just look at one of the possibilities (early death) to declare the best option.

Many say the best gift a retiree can give heirs is to not run out of money and become a burden on them.

 

[samm]

I would take the annuity -- I did so when I had this choice years ago. No regrets!

Annuities purchased by PBGC insured corporate pension plans at termination are NOT PBGC insured. PBGC insurance exists only when plans are ongoing.

See ref:

https://www.investopedia.com/articles/insurance/09/insurance-company-guarantee-fund.asp

 

[Omega]

I would say answering that question is both important and urgent.

The pension is not adjusted for inflation.

 

[Omega]

Betting the pension is not COLA.

Since in the OP's case the lump sum invested into a SPIA is close to the pension (within 15%) I'd take the lump sum & invest it instead of taking the non-COLA pension.

Correct. No COLA. Sorry I was unclear about that.

 

[badatmath]

I'd take the pension to diversify. But I have no heirs. I have not ever seen my megacorp do anything that was not beneficial to them either LOL so I inherently distrust them.

 

[CRLLS]

This works both ways. If you live longer than the breakeven, your heirs get more. You can't just look at one of the possibilities (early death) to declare the best option.

Many say the best gift a retiree can give heirs is to not run out of money and become a burden on them.

Please explain. I thought we were talking just the choice of pension vs cash out monies, not a full financial plan here. How does taking the pension over the cash, leave more money?

I do agree about not being a burden. That's a big consideration in the full financial plan IMO.

 

[RunningBum]

Please explain. I thought we were talking just the choice of pension vs cash out monies, not a full financial plan here. How does taking the pension over the cash, leave more money?

I do agree about not being a burden. That's a big consideration in the full financial plan IMO.

Here's why it's not their full financial plan. If you assume that $223K lump sum can stay untouched and passed to the heirs whenever they die, then it is also true that the $1600 month can be saved too.

If the OP takes the lump sum and dies the next day, the heirs get the $223K more. But if they keep the annuity pension, every month that $1600 they get is $1600 they don't have to take out of their other investments. At some point that's going to add up to be a larger benefit than the lump sum. It may take 20 years or so, but the OP is 57 so that's not at all unlikely. Say the OP dies at 85; their legacy (amount the heirs inherit) is going to be larger by keeping the annuity rather than taking the lump sum.

 

[CRLLS]

Got it. You are assuming that neither is going to be used for expenses after age 65 and they both get invested. I think that is a big assumption. But not out of the realm of possibility I suppose.

I just ran a quick spreadsheet. Assuming your scenario and a modest 5% rate of return (for someone with no need for withdrawing) the OP would be 105 years old before reinvesting the pension starting at age 65 would be greater than investing the cash out now.

 

[TheWizard]

It is quite possible to have invested assets in retirement of a few Million $$$ along with pension/annuity +SS income > $100k per year.
Ask me how I know.

And my annuities had a ten year guarantee period, whereas I guess most pensions do not.

And since my aforementioned income tends to exceed my expenses most months, I'm investing thousands of $$$ each year into stock index funds rather than taking money out.

YMMV, of course...

 

[TheWizard]

Here's why it's not their full financial plan. If you assume that $223K lump sum can stay untouched and passed to the heirs whenever they die, then it is also true that the $1600 month can be saved too.

If the OP takes the lump sum and dies the next day, the heirs get the $223K more. But if they keep the annuity pension, every month that $1600 they get is $1600 they don't have to take out of their other investments. At some point that's going to add up to be a larger benefit than the lump sum. It may take 20 years or so, but the OP is 57 so that's not at all unlikely. Say the OP dies at 85; their legacy (amount the heirs inherit) is going to be larger by keeping the annuity rather than taking the lump sum.

Quite true, RB.

Having a decently large pension/annuity +SS income in retirement is something like setting a backfire in forest fire fighting: you tend to preserve your investment nest egg and even add to it rather than dealing with drawdown strategies.

But it depends entirely on the size of the numbers involved...

 

[RunningBum]

Got it. You are assuming that neither is going to be used for expenses after age 65 and they both get invested. I think that is a big assumption. But not out of the realm of possibility I suppose.

Well, you either assume they both are used for expenses, or they both are not. You can't say they can stash the lump sum for their heirs but need the pension for expenses. That is out of the realm of possibility, IMO.

I just ran a quick spreadsheet. Assuming your scenario and a modest 5% rate of return (for someone with no need for withdrawing) the OP would be 105 years old before reinvesting the pension starting at age 65 would be greater than investing the cash out now.

Given idea. I leave it to the OP to verify those numbers, and decide if using a 5% return is appropriate risk compared to receiving the pension. I've never been clear on whether pensions are always backed by PBGC or not. I did not read samm's link about it.

 

[deserat]

I'd take the pension to diversify. But I have no heirs. I have not ever seen my megacorp do anything that was not beneficial to them either LOL so I inherently distrust them.

OP - you've gotten some great advice across the board here. I will say that when I was given the option, I decided to take the non-COLA pension instead of the rollover. However, it became just one stream of income and was needed at the time in my life as a small confirmed inflow.

You can also calculate the break even point - for me it was age 83. As for rolling into my IRA, I would still be required to either take it as part of RMDs or do a Roth conversion, so tax considerations would need to be added to the financial analysis (ie, if you are single, you could calculate between 12-15% (or whatever you believe your bracket would be) of the amount would be paid in taxes) with the conversion or RMD. You will also pay taxes on the annuity now as it is income, so that could also be calculated.

In any case, I would say YMMV for this decision. There is no one-size fits all.

 

[RunningBum]

Something else occurred to me after thinking more about CRLLS' calculations. My first thought was that the 5% growth rate wasn't fair, compared to the cost of an SPIA to generate that income at 65 which uses a lower rate. Then it hit me that I wouldn't buy an SPIA right now with interest rates so low. So why would I take a pension annuity over a lump sum today based on low interest rates.

I verified CRLLS' calculation of a crossing point at 105 using 5% growth. At 3% the cross over is age 85. 3% guaranteed is a very nice return today, but you would lock in on a 28 year 3% CD with no option to exit early? I don't think I would.

I'd be giving it more thought than a quick spreadsheet and analysis over lunch, but I'd be leaning toward the lump sum now.