Interest rates are increasing for the first time in several quarters, which could reduce the value of ExxonMobil employees' lump-sums. Over the last year, interest rates at ExxonMobil have dropped dramatically which has greatly increased many lump sum payments. This culminated in record low rates for individuals that commence their benefits in the first quarter of 2021. However, it appears now that interest rates are once again starting to rise.
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.
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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 into the old pension calculation method. The old pension calculation method 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 ExxonMobil multiplies this rate by 95% and rounds to the nearest quarter percent. For example, if you retire in December and want to receive your pension in January, ExxonMobil will take the average Treasury rate for July, August, and September, multiply by .95, and then round to the nearest quarter percent.
For the first quarter of 2021, the interest rate is set at 1.25%, tied with last year’s fourth quarter for some of the lowest interest rates ever recorded in ExxonMobil’s long history of paying pension benefits as a lump sum . As a result of these historically low interest rates, we have seen some of the highest pension lump sums in ExxonMobil’s history. As this is written, the current average for the grandfathered rate is 1.25% and this year’s second quarter rate is set to be 1.5%. It appears unlikely that rates would fall enough to bring this average back down to 1.25% again. The rather low interest rates through the first quarter might be sufficient reason for some employees who are considering retirement to take advantage of current rates and retire before this year’s second quarter. In order to take advantage of the current low interest rates, you would need to commence your retirement before March 31, 2021.
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 December, but plan to start your pension in January, ExxonMobil will use the average corporate bond interest rates for the months of August and September 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 first quarter of 2021 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. However you can see that rates came up from August to September. It may be too early to determine what the trend for non-grandfathered rates will be since the second quarter 2021 will be determined by the PPA segment rates for November and December. However, given the current trend on treasury rates, they are moving up. Should they stay here or move higher through the end of the year, we will see higher rates for Q2 and see lower lump sums. (The chart below compares the blended rates for 2019, 2020 and Q1 of 2021):
ExxonMobil Lump Sum Interest Rates for Q1 2021
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 fourth quarter of 2020 to first quarter 2021 may account for a 0% - 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. The middle segment rates have come down 1.37 points from Q4 2019 to Q1 2021. That could mean a change of roughly 12% - 15% in our pension lump sum. If/when rates move back up, these same changes could results in losses of 10% or more and possibly cost tens of thousands of dollars. However, with rates rising it's possible that between Q1 2021 and Q2 2021 you could see a decrease in your lump-sum amount. It is very important we run or update your cash flow analysis so you know all your claiming options.
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