On Monday, General Electric (GE) announced it will freeze its pension plan and offer a lump sum buyout to 100,000 former employees. If you are one of these employees, you face a one-time irrevocable decision that will impact your financial livelihood, literally until the day you die. So how do you decide?
I'll briefly explain here the steps I take when helping clients make this decision:
- Collect the summary plan description (SPD), summary of plan amendments, and buyout offer letter.
- Using actuarial software, calculate the actuarial present value of the pension benefit using actuarial assumptions that are more directly applicable to the pensioner. For example, using a gender-specific mortality table and a discount rate that more accurately reflects the low-risk nature of a pension benefit.
- Adjust number 2 above, if appropriate, to account for the pensioner's specific health, lifestyle, and life expectancy factors.
- Price a fixed annuity in the open market that could potentially replicate the foregone future monthly pension benefit.
- Compare the values in numbers 2, 3, and 4 above to determine the "relative premium or discount" that the lump sum payout offers.
- Carefully discuss and analyze the pensioner's unique financial circumstances and goals to determine if the lump sum payout makes sense (not only from a direct actuarial valuation standpoint but also from the individual's perspective).
Examples of important factors include risk tolerance, tax situation (current and projected future) marital status, non-pension sources of income, financial assets, retirement status (or future estimated retirement age), desire to leave an estate, financial status of the employer company and funded status of the pension plan, and near-term liquidity needs among others.
I have seen many cases in which the lump sum payout fits the pensioner's goals and situation (and represents a reasonable actuarial value proposition), and I have seen plenty of others in which taking a lump sum payout would cause great financial harm. Most people lack the actuarial and financial planning expertise and the requisite software to make a sound decision on their own.
If you are a former GE employee and you have been offered a pension lump sum buyout, please contact me for an objective evaluation of your pension lump sum offer.