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I realize this is an anomaly, but my wife Suzie is in a much better financial position today because she cashed out her Defined Benefit pension for a lump sum payment.
Neither Suzie nor I understood the reasons why the offer was so generous. The financial advisor we consulted about the proposed surrender value also didn’t get the logic but strongly suggested we take the deal.
I don’t like little mysteries that defy normal thinking, so over the last while, I’ve tried to piece together a reason for the offer. My thoughts on this are speculative, but I believe they’re on the right track.
At the time of the offer, Suzie hadn’t worked for the bank for ten years. It was a large, globally diverse UK banking group that had a “super-funded” pension plan. This plan’s assets were well above what was required to meet its future obligations. From what I can gather, the company wanted to freeze the plan and close it to any future accruals, which it has since done.
At the same time, government bond yields—specifically U.S. Treasury yields, which have a massive impact on pension values—were at an all-time low. Because of this factor, I believe the plan essentially had to offer a large lump sum to “buy back” the guaranteed income liability.
When you combine these two very favorable situations that happened to come together at the right time, I think I have a reason for the generous offer. It was a classic case of corporate financial strategy and macroeconomic conditions creating an extraordinary opportunity for a pension plan member.
While we were already in a strong financial position before the offer and can’t honestly say it transformed our lives or retirement prospects, I know it certainly did for some of Suzie’s former colleagues. Sometimes life is full of unexpected gifts, and we were happy this one came calling.
I thought you might find this case study of interest. I’m UK based and although I’ve used the term US treasury yields in reality it was the UK government equivalent, UK guilt yields.
I was offered a pension buyout when the megacorp started downgrading the pension plan. However, when I looked at what size annuity I could buy with the proceeds, it was dramatically lower than the pension payout. I was grandfathered (mothered?) into the old plan, and have never regretted taking the pension. It wasn’t going to increase after I reached 30 years service, and I was able to retire with the full amount the day I reached 30 years.
Kathy,
As I have written before when it came to deciding to take a lump some or a pension payment I also researched what I could get for a payment from commercial insurers and it wasn’t close. I had been reading about annuities and figured at some point I would probably buy one. With taking the annuity through the hospital I knew that since doctors were in the pension plan they would choose a good insurer, so I wouldn’t have to do the research myself. All I had to do was sign one paper and the checks started coming. I calculated that it would take about thirteen years to break even. I took the 100% survivorship option. If my wife lives to the same age as her mother (103+) we will have collected for almost 40 years. Granted the buying power of those dollars decades later will be significantly less however.
As of October 1st I will have been receiving pension payments for twenty five years. Sadly, the amount has lost nearly half its value, but I am still glad to get it. (I did the math – I’ve received well over a million dollars!)
I think 99 times out of a 100 it’s not the best thing to do. We just lucked out.
Mark, I wrote an article a few years back about a unique opportunity for employees with certain pension plans to basically arbitrage taking a lump sum and then buying an annuity at higher rates. This occurred because interest rate rose dramatically in 2022, but some US corporations maintained stable interest rates throughout the calendar year. This allows some former colleague to cash in larger lump sum at low rates, and then buy an annuity at the new higher rates.
Rick, it’s interesting that the buyout was slashed but the monthly benefit remained unchanged.
Dan, I’m not sure about Ford, but our plan was always a Final Aver Pay plan with a monthly benefit as the only form of payment. A lump sum was added in 2014 after my division was sold to a PE firm. The Lump was calculated using IRS defined interest rates and techniques. The opportunity I discussed was purely a result of significant changes in interest rates, and the timing the plan chose to update their rates.
Rick,
Thanks for the article link—I enjoyed reading it with my coffee this morning. This nearly mirrors our experience, but with a much longer time frame.
The pension cash offer was invested and benefited from the mostly strong bull market over the last seven years, notching up an approximate 50% gain. Luck and serendipity intervened again when we decided to purchase annuities this year to cover our essential expenditure. That decision came right at the peak of treasury yields, resulting in a fantastic annuity price.
Suzie ended up with an annuity near the level of her projected pension, with a substantial amount left invested that was nearly equivalent to the original offer. She essentially benefited from both ends of the interest rate cycle: she got the maximum benefit of low rates with the cash offer, and then got the maximum benefit of high rates when she converted a portion of that cash into an annuity.
It was a highly exceptional piece of extreme luck.
I don’t have any pension to deal with, but I’ve always been of the “take it now” mindset. I’d rather invest it myself.
My father worked for an Irish company that was bought by a French company, and they first thing they did was try to rework the pension plan to reduce benefits for current retirees.
It went to court and ended up with a settlement that left my father with less than before, but more than they wanted to give.
I suppose Social Security could be reduced here in the US, but it’s not just a few pensioners who’d be upset, it’s the millions of retired baby boomers, who also vote. Very much a hot potato for the politicians.