Yet another question regarding Megacorp offering pension buyout

[supernova72]

Full disclosure I did search for quite a while before posting but came up short on my question. Apologize in advance if this subject has been covered in another posting.

My Megacorp is offering a pension lump sum to those who retire on April 1st 2016 or later. Our pension will "freeze" at the end of 2015. This is the first time a buyout has been offered to current workforce employees.

A year ago it was offered to those salaried folks who had left the company and not yet drawn on their pension. See post below:

http://www.early-retirement.org/forums/f28/pension-payout-opinions-boeing-73788.html#post1497266

A month ago it was offered to former hourly production workforce (represented by the machinists union in WA state).

So...my question is this: Is there a set formula/calculation companies use when offering a pension lump sum payout? Meaning do that have some flexibility to sweeten the pot so to speak to entice more folks to take it? Initally I thought it all based on discounting the lump sum based on gender, actuarial tables, etc, etc.

A bit about me:

31 yrs at the company
55 yrs old and vested and eligible to retire (just turned 55)
Plan to work 2 more yrs if possible (several reductions in force within our IT organization).

Based on previous buyouts it appears there is a 30% haircut when these are offered. I backed into what it would cost me to purchase a lifetime annuity to create the same income stream is my pension at my current age (~ $630K to create $3080 a month).
I was surprised to read that historically 58% of the folks "take it". Lol.

Cheers.

 

[Dash man]

My DW just went through this at her company, though her pension was frozen a few years ago. She also happens to be high in the HR food chain. These things are determined by a set formula and typically not subject to change unless approved by the board of directors.


Sent from my iPhone using Early Retirement Forum

 

[Animorph]

So how does the offered lump sum compare to the $630k replacement value you calculated?

 

[stepford]

Hi Supernova. While everything is always negotiable in theory I think that for big companies like Boeing the offer is typically take it or leave it. If you refuse the lump sum I'd be very surprised if they'd come back with a sweeter offer. I think we're all likely to get something like the 30% haircut offer - which I have no intention of taking.

 

[Independent]

Does the question relate to "sweetening" for selected individuals within a class?
or to the overall offer?

I'm going to guess that if the sweetening comes from general corporate assets, they can do anything they like. If if comes from the pension trust fund, they are limited. But, I don't know how limited.

Back when the market was high and most pensions were well over-funded, I think a lot of companies just couldn't resist using those extra dollars for something. In some cases, they used it for severance packages for downsizing. ("Severance" here means offering sweeter pensions as part of the termination deal.)

 

[ziggy29]

Back when the market was high and most pensions were well over-funded, I think a lot of companies just couldn't resist using those extra dollars for something. In some cases, they used it for severance packages for downsizing. ("Severance" here means offering sweeter pensions as part of the termination deal.)

My dad went "out" like this, in 1993. When he was 58, his Megacorp (which was also my first Megacorp for 12 years) offered an early retirement incentive he couldn't pass on, including 6 months pay, 100% Megacorp-funded health insurance until age 65, and 5 years of service added to his pension.

When he turned 55 he expected to retire, but his boss didn't want him to retire, so the boss started shielding my dad from most of the stuff that made him want to quit (i.e. he diverted a lot of crap away from dad's BS bucket). So Dad was actually pretty happy to stay for a while and thought he could go a while longer, but that incentive made up his mind and no amount of BS Bucket diversion was going to stop it.

 

[supernova72]

My DW just went through this at her company, though her pension was frozen a few years ago. She also happens to be high in the HR food chain. These things are determined by a set formula and typically not subject to change unless approved by the board of directors.


Sent from my iPhone using Early Retirement Forum

Thanks for the feedback. That would be the case there with the board approval too. This is a 160,000 person company. Cheers.

 

[supernova72]

So how does the offered lump sum compare to the $630k replacement value you calculated?

Oh, I should have clarified. We don't yet know the lump payout value. That comes in January of 16!

 

[supernova72]

My dad went "out" like this, in 1993. When he was 58, his Megacorp (which was also my first Megacorp for 12 years) offered an early retirement incentive he couldn't pass on, including 6 months pay, 100% Megacorp-funded health insurance until age 65, and 5 years of service added to his pension.

When he turned 55 he expected to retire, but his boss didn't want him to retire, so the boss started shielding my dad from most of the stuff that made him want to quit (i.e. he diverted a lot of crap away from dad's BS bucket). So Dad was actually pretty happy to stay for a while and thought he could go a while longer, but that incentive made up his mind and no amount of BS Bucket diversion was going to stop it.

Wow---I like that shielding part a lot.

Our retiree medical will change as well but it's nice to still have it. It will cost a bit more for those that retire in 2016 and later but it's not a huge hit. Thanks again.

 

[supernova72]

Hi Supernova. While everything is always negotiable in theory I think that for big companies like Boeing the offer is typically take it or leave it. If you refuse the lump sum I'd be very surprised if they'd come back with a sweeter offer. I think we're all likely to get something like the 30% haircut offer - which I have no intention of taking.

I was more thinking that for us more "senior" employees they might take less of a haircut but then again I don't really plan on taking it anyway---unless it's more than what a lifetime annuity would cost. Ha.

 

[supernova72]

Does the question relate to "sweetening" for selected individuals within a class?
or to the overall offer?

I'm going to guess that if the sweetening comes from general corporate assets, they can do anything they like. If if comes from the pension trust fund, they are limited. But, I don't know how limited.

Back when the market was high and most pensions were well over-funded, I think a lot of companies just couldn't resist using those extra dollars for something. In some cases, they used it for severance packages for downsizing. ("Severance" here means offering sweeter pensions as part of the termination deal.)

I was thinking for some folks they might sweeten the post a bit more vs. a straight away calculation for everyone. Then again a calculation might take into account those who are older and more years of service. But it's clear the pension is a hot button and commonly referred to as and obligation or a liability…I get that. Then again it's always been

 

[youbet]

I was more thinking that for us more "senior" employees they might take less of a haircut but then again I don't really plan on taking it anyway---unless it's more than what a lifetime annuity would cost. Ha.

Remember that the dollar amount that Mega needs to pay to provide a lifetime retirement annuity for you is less, sometimes significantly less, that you'll have to pay for one as an individual on the open market. And Mega is not likely to pay you more as a lump sum than they would have to pay for a retirement annuity for you.

 

[statsman]

Remember that the dollar amount that Mega needs to pay to provide a lifetime retirement annuity for you is less, sometimes significantly less, that you'll have to pay for one as an individual on the open market. And Mega is not likely to pay you more as a lump sum than they would have to pay for a retirement annuity for you.

Pretty much. The buyout offer from my Mega-corp last year was not even half of what it would have cost to purchase a SPIA. Those who are able to get an offer in the 80+% range may want to consider it (and consider themselves lucky).

 

[supernova72]

Remember that the dollar amount that Mega needs to pay to provide a lifetime retirement annuity for you is less, sometimes significantly less, that you'll have to pay for one as an individual on the open market. And Mega is not likely to pay you more as a lump sum than they would have to pay for a retirement annuity for you.

That's a good point. In an early post someone shared that with a Megacorp pension the cost would be lower given that if someone buys their own annuity typically that person is in better health than the "average" Mega company employee. I had not thought of that element weighing in.

 

[Senator]

I know that to count for a year of pension, you need 1,000 hours in. That's about 6/25 or so. I would suspect that number of years figures into any formula you may have.

If you are thinking about leaving next year, see when he pension year is increased. It may be year end, anniversary, or a certain number of hours.

 

[ziggy29]

That's a good point. In an early post someone shared that with a Megacorp pension the cost would be lower given that if someone buys their own annuity typically that person is in better health than the "average" Mega company employee. I had not thought of that element weighing in.

Yep, there is a fair amount of adverse selection, in a manner of speaking, in the SPIA market. It's not the sickly, chain-smoking and hard-drinking person with a family history of developing cancer before the age 70 who is going to be the target market for those products...

 

[supernova72]

I know that to count for a year of pension, you need 1,000 hours in. That's about 6/25 or so. I would suspect that number of years figures into any formula you may have.

If you are thinking about leaving next year, see when he pension year is increased. It may be year end, anniversary, or a certain number of hours.

OP here...our pension freezes at the end of this year so no more "age based credits" will accrue. However the "interest based credits" will continue to accrue. Working longer the monthly value increases a bit but not as much as the current plan of course. So for the most part I pretty much know where I'll stand by year end (31.28 yrs. of service). That is an estimate. Lol.

Those who stay for 2016 will get an additional 9% company contribution to a 2nd 401K plan. Not too shabby..

 

[supernova72]

Full disclosure I did search for quite a while before posting but came up short on my question. Apologize in advance if this subject has been covered in another posting.

My Megacorp is offering a pension lump sum to those who retire on April 1st 2016 or later. Our pension will "freeze" at the end of 2015. This is the first time a buyout has been offered to current workforce employees.

A year ago it was offered to those salaried folks who had left the company and not yet drawn on their pension. See post below:

http://www.early-retirement.org/forums/f28/pension-payout-opinions-boeing-73788.html#post1497266

A month ago it was offered to former hourly production workforce (represented by the machinists union in WA state).

So...my question is this: Is there a set formula/calculation companies use when offering a pension lump sum payout? Meaning do that have some flexibility to sweeten the pot so to speak to entice more folks to take it? Initally I thought it all based on discounting the lump sum based on gender, actuarial tables, etc, etc.

A bit about me:

31 yrs at the company
55 yrs old and vested and eligible to retire (just turned 55)
Plan to work 2 more yrs if possible (several reductions in force within our IT organization).

Based on previous buyouts it appears there is a 30% haircut when these are offered. I backed into what it would cost me to purchase a lifetime annuity to create the same income stream is my pension at my current age (~ $630K to create $3080 a month).
I was surprised to read that historically 58% of the folks "take it". Lol.

Cheers.

Update from OP here. We recently found out that we'll know the buyout number by February 2nd 2016. I've done several random Bing searches on "pension buyout calculator" and there doesn't seem to be a one catch all calculator.

In the office opinions vary on how it will be calculated---outside of the "normal" considerations like age, gender, yrs of service, able to retire, etc, etc.

I've seen one reply on this forum warning that simply comparing what they offer to what you can buy a lifetime annuity would cost has it's accuracy issues as well. For example most folks willing to buy an annuity are more likely to have better health than the average Joe or Jane at a big corporation. I get that...meaning they plan on living longer so they are willing to buy an annuity for that guaranteed income stream.

I'd welcome any thoughts on those who have gone through a pension buyout exercise!

 

[robertf57]

These questions really are about comparing alternatives. One alternative is keeping your current interest in the pension. This leads to a calculated cash stream which, it appears from your post, is $3080/month. Anoth alternative is the lump sum which would buy a specific monthly cash flow on the open annuity market. But, one also needs to consider who well funded the pension plan is and how strong the financial performance of the company backing both the pension and the annuity.

The final alternative is what you might do with the lump sum other that creating a monthly cash flow. Some people value the lump sum more highly because they have a real need for the cash or a desire to invest in a business,etc.

My interpretation of the large number who go for the buyout given the universal haircut that is applied is that they simply don't understand the math.....

 

[supernova72]

These questions really are about comparing alternatives. One alternative is keeping your current interest in the pension. This leads to a calculated cash stream which, it appears from your post, is $3080/month. Anoth alternative is the lump sum which would buy a specific monthly cash flow on the open annuity market. But, one also needs to consider who well funded the pension plan is and how strong the financial performance of the company backing both the pension and the annuity.

The final alternative is what you might do with the lump sum other that creating a monthly cash flow. Some people value the lump sum more highly because they have a real need for the cash or a desire to invest in a business,etc.

My interpretation of the large number who go for the buyout given the universal haircut that is applied is that they simply don't understand the math.....

Thanks for the input. I should have mentioned that our pension fund is well funded and the company financial health is very strong right now. I've read that 58% of the folks take buyouts which I believe can be an emotional decision (at times) vs. a financial decision. But if the company is doing poorly I can see why folks take it.

 

[stepford]

Hello again Supernova. I was one of the herd who abandoned the "Big Blue B" on 12/31. Since most folks knew I was leaving I had the chance to talk over retirement plans with a number of my colleagues (most of whom planned to leave in their early to mid 60s). I was surprised to find how many of them were seriously considering taking the pension buyout - as well as taking SS at 62 (or immediately upon retirement but before FRA, if later).

These are smart people - senior scientists and engineers (T6's and Tech Fellows) who have presumably worked the numbers. They just have lives in which short term demands weigh more heavily than long term planning - at least compared to the long-term-obsessed crew found around these forums. We all make different choices, and to be fair all these folks have nicer houses, drive nicer cars (and most importantly have more kids) than I do. Then again, I've spent 7 of the last 10 days just riding around on my Mountain Bike. Different strokes.

 

[supernova72]

Hello again Supernova. I was one of the herd who abandoned the "Big Blue B" on 12/31. Since most folks knew I was leaving I had the chance to talk over retirement plans with a number of my colleagues (most of whom planned to leave in their early to mid 60s). I was surprised to find how many of them were seriously considering taking the pension buyout - as well as taking SS at 62 (or immediately upon retirement but before FRA, if later).

These are smart people - senior scientists and engineers (T6's and Tech Fellows) who have presumably worked the numbers. They just have lives in which short term demands weigh more heavily than long term planning - at least compared to the long-term-obsessed crew found around these forums. We all make different choices, and to be fair all these folks have nicer houses, drive nicer cars (and most importantly have more kids) than I do. Then again, I've spent 7 of the last 10 days just riding around on my Mountain Bike. Different strokes.

Nice hearing back Stepford! There was certainly that incentive to leave by the end of 2015 ("frozen" retiree medical at $20 a month being one).

I'm still hear but there are many days it feels like it might be sooner vs later. PM reviews not very positive, raises have really leveled off, etc. etc.

Could be worse but I'm trying hard not to make an emotional decision just based on me being nudged out.

 

[papadad111]

There is a calculation for determining the pension amount. Your HR benefits department has the formula - call the help line and ask.

With rates having risen 0.25 percent last month, I suspect the pension lump sum amount may have come down since the last offering by a little bit. Usually when interest rates rise the present value of the pension drops.

 

[CRLLS]

I took the lump sum buyout over the pension as it gives me total control. It also allows me to manage what I leave to my heirs if I pass on earlier than planned. It also simplifies overseeing my cash flow. Most of my expense "nut" will be covered by SS so much of everything else is gravy.

 

[supernova72]

There is a calculation for determining the pension amount. Your HR benefits department has the formula - call the help line and ask.

With rates having risen 0.25 percent last month, I suspect the pension lump sum amount may have come down since the last offering by a little bit. Usually when interest rates rise the present value of the pension drops.

That's a great idea to give your retirement benefits office a call. Thanks for the feedback!