Jul 20, 2020 10:08:11 AM / by The Retirement Group
Interest rates have dropped dramatically over the last year, which has greatly increased many lump sum payments. Interest rates are currently sitting at record lows for individuals that commence their benefits in the fourth quarter of 2020 . Although the next quarterly rates for the first quarter of 2021 are not out yet, the trend is even lower with August rates coming in at unbelievable 0.59 for the first segment, 2.25 for the second segment and 3.01 for the third segment . We will explain what this all means and how you can benefit below.
Your pension is calculated based on your last date of employment and benefit start date. The benefit calculation is a defined benefit based on your years of service and final average pay. These along with a social security offset are used to determine your single life annuity. All other forms of pension payments are based off this figure.
If you decide to take your pension as a lump sum, ExxonMobil will use interest rates and your age to calculate your lump sum payment. When interest rates move up or down, your pension lump sum amount will move in an inverse relationship.
Watch Our ExxonMobil Interest Rate Update
ExxonMobil Pension Lump Sum Calculation:
If you are at least 63 years old with at least 23 years of ExxonMobil service by December 31, 2020, you are considered grandfathered in to the old pension calculation method that uses the 30-year Treasury bond interest rates. ExxonMobil will take the average Treasury rate for the fourth, fifth and sixth months prior to the quarter you elect to “commence” your pension benefit, also known as your benefit commencement date (BCD). Then they multiply this rate by 95% and round to the nearest quarter percent. For example, if you retire in November and want to receive your pension in December, ExxonMobil will take the average Treasury rate for April, May and June, multiply by .95, and then round to the nearest quarter percent.
For the fourth quarter of 2020, the interest rate happens to be 1.25%, the lowest recorded interest rate in ExxonMobil’s long history of paying pension benefits as a lump sum. This compares to the third quarter 2020 rate of 1.75%, also a historical low at the time. As a result, we are seeing some of the largest pension lump sum payments in history. In order to take advantage of the fourth quarter
interest rate, you would need to retire in 2020 and commence your pension benefit between October 1, 2020 and January 1, 2021. Grandfather employees are also offered a unique opportunity to retire at the end of the year, set their BCD for January 1st, collect their vacation pay for 2021, and still take advantage of 4th quarter 2020 interest rates.
If you are not at least 63 years old with at least 23 years of ExxonMobil service by December 31st, 2020, then you are not grandfathered into the old pension calculation method. In calculating your lump sum, ExxonMobil will uses the average of the short, intermediate and long term corporate bond segment rates of the fourth and fifth month prior to the quarter you plan to commence your pension benefit. For instance, if you plan to retire in September, but plan to start your pension in December, ExxonMobil will use the average corporate bond interest rates for the months of May and June to calculate your pension lump sum (the average of the fourth and fifth month prior to the quarter you plan to start your pension).
The rates in effect for the fourth quarter of 2020 are the lowest rates in history for non-grandfathered employees, producing some of the highest lump sums since this calculation method went into effect almost a decade ago (The chart below compares the third and fourth quarter 2020 blended rates):
For lump-sum conversions, the pension annuity is discounted to a present value using the first segment rate for the first five years of expected payments, the second segment rate for the next 15 years of expected payments and the third segment rate for all years of expected payments over 20. Because the annuity is discounted based on mortality as well as interest rates, the present value of each monthly payment reduces as the probability of living to receive each payment reduces. The older you are when you commence your pension benefit, the fewer the number of years that will be valued using the third segment rate (20+ years) and, conversely, the younger you are, the greater the number of years that will be valued using the third segment rate.
|"...on average, a 1% change could increase or decrease your pension lump sum by roughly 10%"|
This methodology essentially means that there will be a unique quarterly interest rate (lump-sum conversion factor) for each year and month of birth.
How Do Rate Changes Affect Your ExxonMobil Pension?
Pension pricing is based on interest calculations, therefore making a slight adjustment in your retirement date may have a significant financial impact on your pension due to changing rates each month.
Everything else held equal, a lower interest rate will produce a higher lump sum. The exact changes
depend on your specific age, but on average a 1% change in rates can equate to an 8% to 12% change in lump sums. So, on average, a 1% change could increase or decrease your pension lump sum by roughly 10%.
The changes from third to fourth quarter 2020 may account for a 2% - 5% increase in lump sums,
depending on whether or not you are considered grandfathered. However, if you look at where rates
were last September, they have come down quite a bit. Since fourth quarter 2019, interest rates for both grandfathered and non-grandfathered employees have dropped close to 1%. A drop of 1% may have caused your pension to rise by close to 10%. For someone with a $500,000 lump sum, that could mean a change of $50,000. For a $1,000,000 lump sum, it would be roughly $100,000. Going forward, if rates start to move back up, you could see your pension lump sum start to drop. The rates are updated quarterly, so you have quarter by quarter options to commence your pension if you have retired. You do not have to commence your pension as soon as you retire. You have the option to defer it. That may be beneficial if rates are dropping and/or you are under 60 years old. If you take your pension prior to age 60 there are age penalties and you will not receive 100% of your pension benefit.
Securities through FSC Securities Corporation, member FINRA/SIPC and investment advisory services
offered through The Retirement Group, LLC, a registered investment advisor not affiliated with FSC
Securities Corporation and ExxonMobil. Office of Supervisor Jurisdiction: 5414 Oberlin Dr #220, San Diego CA 92121. (800) 900-5867
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