Could Lump-Sums for Grandfathered Southern California Edison employees be on the decline? The September interest rates, which Southern California Edison uses to determine lump sum values for everyone who retires in 2022 were released in October. We now have new monthly segment rates which show that interest rates are continuing to rise. Rates have been steadily increasing over the past year and with the recent announcement of next year's interest rates we are very likely to see a reduction in lump-sum values for Southern California Edison employees who retire in 2023. Southern California Edison interest rates decreased in 2020 causing 2021 lump sums to hit record highs. Based on the current trend of interest rates and monetary policy announcements it is likely that rates seen in 2020 will be the lowest for the foreseeable future - meaning that the Lump Sum Values for Southern California Edison employees who retired in 2021 will likely be the highest for the foreseeable future. When interest rates move up or down, your pension lump sum amount will move in an inverse relationship.
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The Southern California Edison Pension Plan is a great retirement benefit for SEC employees. Your exact pension depends on your hire date, original company, and if you are grandfathered or not. For grandfathered employees, the core pension benefit uses a calculation method looking at your years of service and final average pay or wage bands to determine your monthly annuity. From there you have the option to choose a joint annuity or a lump sum. The lump sum calculation will depend on your age and the current interest rate environment.
Southern California Edison Pension Lump Sum Calculation:
For the lump sum calculation, Southern California Edison uses the PPA (Pension Protection Act) segment rates. These are 3 different segment rates based on years in retirement. The first segment is used for the first 5 years of retirement. The second segment is for years 6 through 20. The third segment is for years 21 and beyond. Your age will determine how many years segment 3 is used. These segment rates are updated monthly. Southern California Edison uses the results of the September rates to determine the interest rates used for the grandfathered lump sum calculation in the following year. The segment rates are generally released about 3 weeks into the following month.
In 2021, the rates moved up through the spring then came back down a bit in the summer. Since then, they have started moving back up again. As of this writing, the October rates for 2022 have not been published, and while those rates will not have a direct impact on 2022 pension lump sum values, it's important to understand the current trends so that you'll have a much better understanding of how your pension lump sum value will be impacted if you choose to wait until after 2022 to retire. Currently, the monthly rates for May are 3.23 for the first segment, 4.59 for the second segment, and 4.69 for the third segment. Since the 2nd segment covers 15 years of retirement it has the largest weighting on the calculations. In comparison to the rates from September 2021 which were 0.70/2.55/3.06, the current rates have increased about 2.4%, which means if lump-sum calculations were done today that you'd likely lose 24% on your lump-sum. Based on the newly published rates, the rates in September are likely to see even more increases, which means lump-sum values after 2022 might see a significant decrease..
In addition to the lump sum reduction in 2022, there are many other changes affecting employees, especially managers. If you would like to review your situation, we can run a complimentary detailed cash flow analysis to show you various retirement dates and how the Southern California Edison benefits may change. Click here to schedule a Cashflow Analysis.
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The annuity is discounted based on mortality as well as interest rates, meaning 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.
This methodology essentially means that there will be a unique monthly interest rate (lump-sum conversion factor) for each year of birth.
How Do Rate Changes Affect Your Southern California Edison Pension?
Pension pricing is based on interest calculations, which means a slight adjustment in your retirement date may have a significant financial impact on your pension due to changing rates each year.
Everything else held equal, a higher interest rate will produce a lower 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 current changes discussed above of 0.41% will likely mean a decline of 4-5% in your lump sum. For someone with a $500,000 lump sum, this could mean a move of as much as $25,000. For a $1,000,000 lump sum, it would be roughly $50,000. It is very likely we will see rates move even higher in 2022 which will lead to a further drop in lump sums for 2023. Should they go up by 1%, then changes could be 10%. That could mean a $50,000 decrease on a current $500,000 lump sum or $100,000 on a $1,000,000 lump sum.
|"A 1% change could increase or decrease your pension lump sum by roughly 10%"||
Given the current interest rate environment, it is highly suggested you discuss your options with The Retirement Group and allow us to monitor the rates and keep you up to date on the monthly changes. We can provide a complimentary cash flow analysis to show you how various retirement dates may play out.
It is important to remember the pension annuity may be a better fit no matter how attractive the pension lump sum may be. Every situation is unique, and a cash flow analysis will allow you to compare all pension options. To schedule a cashflow analysis please click the button below:
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, sce.com, or Southern California Edison. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
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