Pension Buyouts

,

Consumer Alert: Have GM and Ford provided one of the greatest Money Grabs for the Financial Services Industry?

,

 

The automobile industry has played an important role in many Michiganders’ lives. I recall my own great-grandfather Mel working for Ford Motor in Dearborn. Mel was able to provide my great-grandmother and their children (my grandmother) a comfortable middle-class lifestyle thanks to his work there. Today, hundreds of thousands of people—both current employees and retirees--continue to depend upon automobile companies to help care for their families. 

Ford and GM have both recently announced changes to their pension benefits affecting an estimated 130,000 retirees. More of the details are laid out in my two recent blogs (May 4th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?” and June 13 blog titled “GM Pensions to Follow Ford...With a Twist”), but the essence of the change comes down to choosing between (1) continuing to receive a monthly pension check that will be payable for the rest of your life, and (2) electing to forgo monthly payments and taking a one-time lump sum. 

Consumer Alert: Let’s face it – the financial services industry doesn’t have the greatest track record. Several firms in the financial services industry are already geared up to get their share of the lump sum payments via “free” seminars and “free” consultations. I am sure many of you were given the same sage advice my great-grandfather shared with me one time: there’s no such thing as a free lunch. 

Those in the financial planning industry get compensated in a variety of ways: fees, commissions, or a combination of both. Professionals that provide value deserve to be compensated. However, some advisors in the financial services industry do not get compensated for advising you to continue to take the monthly pension. And yet, this might be the most prudent decision for anyone with a normal life expectancy. 

Financial advisors/consultants/salespeople/insurance agents/stock brokers are often biased for you to elect the lump sum option. A professional financial advisor will start with a clean slate – learn about your unique situation and objectives – and then provide tailored recommendations based on the tradeoffs between the options. Any advisor advocating only one option should be avoided. 

What to do? The tricky situation with the GM and Ford offers is that general rules and rules of thumb just don’t work. You must take a lot of factors into consideration. So, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks. In some cases the lump sum offer made the most sense, but in others, we advised sticking to the pension option. Each situation is unique, and we have come to different conclusions based upon their individual circumstances, so make sure you are getting the best advice possible and not just a “free lunch” offer. 

 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

,

GM Pensions to Follow Ford...With a Twist

,

  

Much like Ford Motor Company’s recent announcement, GM is making pension offers to reduce their pension liabilities. [See my May 4th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?”]

Companies like GM usually desire to pay pensions via a lump sum as this can make their balance sheet look better.  Moreover, due to legislation going back to the Pension Protection Act of 2006 (that is now fully in effect), the cost of paying a lump sum for companies has been reduced.

Now the twist: 

GM retirees that elect to continue the monthly pension method will now have their payments “administered” by The Prudential Insurance Company of America.  Administered in this case has a special meaning; checks will come from Prudential and no longer receive the benefit of being covered and insured by the Pension Benefit Guaranty Corporation (PBGC), a U.S. Government Agency (www.PBGC.gov). Rather, annuity payments from Prudential will carry more limited guarantees from each state (For Michigan see www.milifega.org). Fortunately the insurance industry as a whole has been reliable in terms of paying benefits.  In fact, Prudential has never missed paying an annuity payment.  So, there are arguably less guarantees associated with payments from Prudential – but probably not enough to affect the decision in either direction. 

What to do? General rules and rules of thumb just don’t work here.  First, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks.  Each situation is unique and we have come to different conclusions depending on their individual circumstances.  If we can help you make an informed and prudent decision – one that has the potential to significantly impact (positively or negatively) your wealth for years to come - please feel free to call or email me.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James

,

Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?

,

 On April 27, 2012, Ford Motor Company announced via an internal communication a voluntary lump sum buy-out offer for 90,000 retirees and surviving beneficiaries.   Essentially, Ford wants to pay off or pay out as many retirees as possible.  So why of the sudden generosity?     There are two primary reasons:

    1. To get retirees off the books. Paying lump sums will get the pension liability off of their company balance sheet – which according to Bob Shanks, Ford executive vice president and chief financial officer, will "improve the underlying strength of our balance sheet”. And,

    2. The math looks better in 2012. The Pension Protection Act of 2006 (“PPA”), fully in effect in 2012, allows companies to use the higher yielding corporate bond rate versus the lower Treasury rate when calculating lump sum payments; making the cost of a lump sum lower to employers such as Ford.

Point 2 forces us to further consider how lump sum payments are calculated (for all employers – not just Ford Motor) and its impact on our decision making process.  

How the Math Affects the Company and Retirees

First let me apologize to all of the actuaries (i.e. number crunchers with serious calculators) for grossly underestimating the complexity of the calculation.    Calculating a lump sum takes into account factors such as your specific income, years of service, age, and survivor’s age, if any.    In addition, a “discount” rate is used in determining how much all of the monthly payments (present value) would equal if paid in a single lump sum today.   Why is the discount rate important?

    1. The higher the discount rate, the smaller the lump sum.

    2. The lower the discount rate, the greater the lump sum.

On a relative basis, with general interest rates near historical lows, lump sum payments should be higher than say 10 years ago.  However, the change in the discount rate via the PPA significantly reduces an employer’s lump sum payment obligations – perhaps by as much as 30%. So while Ford has had a desire to offer this type of payout in the past – waiting until 2012 provided a lower cost.

So, let’s agree for the moment that this plan is good for Ford’s balance sheet. However, there is a far more important issue: Is a lump sum good for your finances? Are you better off receiving a one-time lump sum payment rather than guaranteed lifetime monthly payments (guarantees based on For Motor’s ability to continue payments)? What’s good for the company….may or may not be good for you. (I don’t say this lightly – growing up in Dearborn I witnessed firsthand Ford’s exemplary community stewardship). I do however suggest taking a page out of Fords book – run the numbers to see what is most appropriate for you.

Is it good for your finances?

So how much is at stake? Plenty. For example, a 60 year old male entitled to a $2,000/monthly pension might be offered a lump sum close to $600,000 depending upon the actual discount rate used (this is a hypothetical only assuming a single life payment and 3.5% discount rate). Depending upon your unique circumstances this might be a “good deal” – but it might not.

On one side, if you are someone with a long life expectancy and very risk averse you should consider declining the lump sum and sticking with the monthly benefit.    On the other hand, if you are single and not in good health, taking the lump sum might be a better option. As you might expect, most folks will fall somewhere in between these two extremes.

At the risk of stating the obvious, this is a complex and important decision, and you are encouraged to consult with a financial planner and/or tax advisor. Talking with an experienced advisor about your personal situation can help lead to an appropriate decision focused on your balance sheet.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Live YOUR Plan™