As Boeing (BA -0.16%) continues to restructure its business, the company is offering former employees an option to cash out their pension benefits. A move that will likely make a dent in the company’s pension obligations going forward, says spokesman Ron Taylor.
The offer applies to 40,000 former non-union workers who have not yet retired. They can choose to take a lump sum payment or an annuity.
Benefits
Boeing has been making an effort to de-risk its pension liability, offering an option for 40,000 employees who have not yet retired to receive a lump sum payout or an annuity. The move is intended to curb the unsustainable growth of the companys pension obligations.
A key factor in Boeings decision to offer the benefit is interest rates. The company resets the interest rate used in its calculation of pension benefits once a year.
Currently, interest rates are very favorable for those who choose the lump sum option and very unfavorable for those who opt to receive a monthly payment. If interest rates were to increase by 1% this year, it would cut $78,000 off of the total amount that many engineers will receive in a lump sum if they retire after November 30, 2022.
This is a major concern for hundreds of qualified engineers who have been working at Boeing for several years and who are now nearing retirement age. The increased interest rate will reduce the amount they will receive in a lump sum and could force them to retire early.
Lump Sum
A growing number of companies are de-risking their pension plans by offering lump sum payments to former employees. This has become an important tactic for many employers because it allows them to shave pension liabilities and minimize premiums from the Pension Benefit Guaranty Corporation (PBGC), says Towers Watson.
Boeing is one of the first companies to offer this option to its 40,000 former employees. This is the first time the company has offered such options from its defined benefit plans and could make a dent in its pension liability going forward, according to Ron Taylor, Boeing spokesman.
The lump sum calculation varies depending on the employee’s age and years of service. It is also influenced by interest rates, which have been rising this year. In addition, Boeing resets the interest rate used in its calculation once a year, each November.
Annuity
As a Boeing employee who has retired in 2022, you should be aware that the amount of your lump sum benefit may be reduced. This is because interest rates have significantly increased over the past year and you will need to take into account this when calculating your annuity value.
The underlying interest rates used to calculate the annuity benefits for Boeing employees will reset each November. This means that the value of your pension will decrease by a few percentage points each year until you reach your annuity date.
For example, an engineer who currently has a $1 million lump sum may see a 20% reduction in the value of their lump sum if interest rates increase by 1% over the next two years.
This is a tactic that has become popular among companies looking to limit their growing liabilities and avoid a non-cash charge to equity in the fourth quarter, which is required by accounting rules under ERISA (Employee Retirement Income Security Act). In fact, Motorola Solutions last month incorporated this type of plan into its pension.
Retiree Options
Boeing has frozen the traditional pension plans for its 68,000 non-union employees and will replace them with a defined contribution retirement savings account. Employees have until Friday to decide whether they want to participate in the new plan or remain in their old pension plans.
The decision is a tough one for many of the company’s engineers, especially for those close to retirement. They have to choose between a lump sum or a fixed income monthly check for life that decreases in value with inflation.
That could mean a 20 percent drop in a $1 million lump sum payment if interest rates go up by 1% in November, the first year Boeing resets the calculation. That’s more than a $200,000 cut in a 35-year engineer’s payout, according to the calculations.
The math became the key flashpoint in talks between Boeing and its white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA). It’s a decision that’s made even more difficult by a pension deadline that will see hundreds of veteran engineers retire this fall ahead of a dramatic pension adjustment that slashes their lump-sum payouts.
