Lucent offering pension buyout to retirees: what to do?

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Browser
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Lucent offering pension buyout to retirees: what to do?

Post by Browser »

My brother-in-law is a retired manager from Lucent and told me today that he received a letter indicating that Lucent intends to terminate it's corporate pension program. As a previously retired employee he will be offered the option of a lump sum buyout of his pension or an annuity to be managed by an insurance company. He doesn't know the specifics yet. However, he's beginning to weigh the pros and cons of an annuity vs. a lump sum buyout and investing the money. I'd like to collect some BH wisdom on this subject in terms of what information and factors he need to have on his checklist in order to effectively weigh his options and make a good decision. In addition like to hear from other folks who may be retired Lucent employees and what they're thinking. This is probably not the first or the last in the coming wave of companies that are getting out of the pension business, so it is probably something to have on your radar if you have or are expecting a retirement pension.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by derosa »

There are many other posts about this topic. You might want to do some searching.

IMO take the money and run. But that is an emotional decision of course.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

How can he weigh the pros and cons before he knows the specifics?

As a GM retiree I was faced with the same choice. I chose the annuity, but not before I knew the specifics.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by ubermax »

cheese_breath wrote:How can he weigh the pros and cons before he knows the specifics?

As a GM retiree I was faced with the same choice. I chose the annuity, but not before I knew the specifics.
+1 more details needed !!!
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Re: Lucent offering pension buyout to retirees: what to do?

Post by lack_ey »

If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Steelersfan »

Besides the financials of the offer, he needs to consider his age, general level of health, and whether or not longevity runs in his family.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Watty »

It would be good for him to get a very good physical before he decides so he will have as much information about his health as possible. He should ask the doctor if it would be worth getting any additional tests even if the insurance company will not pay for some of them.

He should also ask if it is possible to chose to take half the pension and half the annuity.

If he was not already planning on delaying Social Security until he is 70 (or some permutation with his wife if he is married) then once option would be to take the lump sum and use part of that to live on until he is 70 then he can start getting a larger Social Security check. That is basically buying an inflation adjusted government annuity which would likely be better than the insurance company annunity.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by bsteiner »

lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.

If he takes the lump sum, he may be able to convert some or all of it to a Roth, either all at once or over a number of years. That may add substantial value.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

I retired from Lucent in 2001 and receiving a pension under the management plan. I have not received a letter with the offer (yet). My default inclination is to continue getting an annuity even if the payer will change. I will monitor this thread for other ideas.

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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change. However, it will lose the PBGC protection.

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

VictoriaF wrote:
bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change. However, it will lose the PBGC protection.

Victoria
Can't speak for Lucent but in the GM case the Prudential annuity they provided has exactly the same payments and benefits as my old GM pension, minus the PBGC protection. However the lump sum they offered was not sufficient to purchase a comparable annuity on the open market.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

cheese_breath wrote:
VictoriaF wrote:
bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change. However, it will lose the PBGC protection.

Victoria
Can't speak for Lucent but in the GM case the Prudential annuity they provided has exactly the same payments and benefits as my old GM pension, minus the PBGC protection. However the lump sum they offered was not sufficient to purchase a comparable annuity on the open market.
The ALU offer will probably be similar. I can't think of any logical reason for ALU to offer a lump sum that would be equivalent to a greater pension.

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by normaldude »

It's possible for the insurance company (issuing the annuity) to go bankrupt or collapse, etc (like National Heritage Life Insurance Company).

- http://www.investopedia.com/articles/in ... e-fund.asp

- https://en.wikipedia.org/wiki/Sholam_Weiss

- http://www.hulu.com/watch/163339


So before you go with any annuity, you should consider..


1) Credit rating of the insurance company. S&P, Moodys, AMbest. Credit ratings for major insurance companies can range from AAA to BBB-.

- https://www.immediateannuities.com/insu ... y-ratings/


2) State guarantee limits for annuities. State coverage limits for annuities can range from $100,000 to $500,000.

- http://www.annuityadvantage.com/stateguarantee.htm

- http://www.findyourannuity.com/Annuitie ... uity-Guide


3) Credit rating of the state. State credit ratings range from AAA to A-.

- http://www.pewtrusts.org/en/research-an ... tings-2014

- http://ballotpedia.org/State_credit_ratings


So maybe look at the lump sum amount, and get price quotes for immediate fixed annuities from high credit rating insurance companies (staying under state guarantee limits), and see if you would be able to get a better annuity situation (higher monthly payments to you, better credit ratings, split up between multiple insurance companies to stay under the state guarantee limits, etc).

Or you could just take the lump sum, and roll it into a IRA boglehead portfolio of globally diversified stock & bond index funds. This gives you the most liquidity & mobility & freedom, since you're not tied to any one company for life.

- http://www.bankrate.com/finance/retirem ... sum-2.aspx

- https://www.fidelity.com/viewpoints/ret ... ly-pension

- http://www.kiplinger.com/article/retire ... r-not.html

- https://www.calcxml.com/calculators/lum ... r-payments
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Re: Lucent offering pension buyout to retirees: what to do?

Post by celia »

He needs to take inflation and life expectancy into account.
If married, he needs to consider when he or his wife dies, will the survivor be able to live comfortably.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by bberris »

cheese_breath wrote:
VictoriaF wrote:
bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change. However, it will lose the PBGC protection.

Victoria
Can't speak for Lucent but in the GM case the Prudential annuity they provided has exactly the same payments and benefits as my old GM pension, minus the PBGC protection. However the lump sum they offered was not sufficient to purchase a comparable annuity on the open market.
This would almost always be the case. Pensions are group annuities that don't suffer selection bias.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cherijoh »

This thread may be of interest to your brother-in-law..
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

cherijoh wrote:This thread may be of interest to your brother-in-law..
Thank you for the reference, it is in fact of great interest.

One difference between the two threads is that g$$'s discussion is focused on the initial decision, in which a retiring employee is choosing between a lump sum and the company's pension plan. This thread is focused on the secondary decision, in which an existing annuitant is choosing between a lump sum and receiving the same payouts from a different payer.

Differences between the two annuities include:
- Instead of the PBGC coverage of the payer, an annuitant is now subject to the state coverage
- Different taxation by the state, which may have lower or zero rates for qualified pension plans but not SPIAs
- Other?

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

I have thought of some secondary factors that may influence the decision.

1. Confirmation bias, a well established cognitive feature, causes current Lucent annuitants to prefer an annuity, because we have already made this choice in the past and have been receiving the annuity for many years.

2. Financial advisers are paid based on the AUM, and it's in their interest to recommend a lump sum, which would increase managed assets.

3. The possibility of future cognitive decline is an important reason to prefer an annuity managed by someone else. A recent example of a cognitive stress is database breaches of major employers (including the OPM database of all Federal employees) and password management companies (LastPass). Even those of us who are sharp enough to manage our financial assets must make extra effort to protect these assets from a catastrophic loss.

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

VictoriaF wrote:
cherijoh wrote:This thread may be of interest to your brother-in-law..
Thank you for the reference, it is in fact of great interest.

One difference between the two threads is that g$$'s discussion is focused on the initial decision, in which a retiring employee is choosing between a lump sum and the company's pension plan. This thread is focused on the secondary decision, in which an existing annuitant is choosing between a lump sum and receiving the same payouts from a different payer.

Differences between the two annuities include:
- Instead of the PBGC coverage of the payer, an annuitant is now subject to the state coverage
- Different taxation by the state, which may have lower or zero rates for qualified pension plans but not SPIAs
- Other?

Victoria
Again, relating my GM experience... In our case the pension was qualified, and the Prudential annuity GM created from it is also qualified. So there is no difference in my taxation.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

Thank you, cheese_breath, it's good to know.

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

VictoriaF wrote:Thank you, cheese_breath, it's good to know.

Victoria
Remember, there's no guarantee Lucent will do it the same way GM did. GM and Prudential handled the details of the financial transfer so the money went directly from GM to Pru without me ever touching it. If I had taken the lump sum and bought a SPIA on my own it might have been different. For example if I had converted the lump sum into a taxable account and bought a SPIA with the after tax money I'm guessing it would have been unqualified. If I had rolled the lump sum into an IRA and bought a SPIA from the IRA I suppose it might be more complicated depending on the details of the purchase.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by VictoriaF »

cheese_breath wrote:
VictoriaF wrote:Thank you, cheese_breath, it's good to know.

Victoria
Remember, there's no guarantee Lucent will do it the same way GM did. GM and Prudential handled the details of the financial transfer so the money went directly from GM to Pru without me ever touching it. If I had taken the lump sum and bought a SPIA on my own it might have been different. For example if I had converted the lump sum into a taxable account and bought a SPIA with the after tax money I'm guessing it would have been unqualified. If I had rolled the lump sum into an IRA and bought a SPIA from the IRA I suppose it might be more complicated depending on the details of the purchase.
I will be in a better position to discuss it when I actually see the offer. This won't happen for a week, because I am leaving for the airport shortly.

Your point is well taken. I am planning to do Roth conversion of my TSP funds, but if I took the ALU pension as a lump sum, it would be an additional opportunity. In the absence of the ALU pension:
- I would have more room in my low-tax-bracket space to do Roth conversions before the age of 70
- The taxation of my Social Security might be lower, if I convert all traditional IRA/401k/TSP into Roth and have less pension income

I greatly appreciate your inputs,

Victoria
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Re: Lucent offering pension buyout to retirees: what to do?

Post by TradingPlaces »

cheese_breath wrote:How can he weigh the pros and cons before he knows the specifics?
+ 10
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Parthenon »

The specifics to the Alcatel-Lucent plan can be found at http://files.cwa-union.org/teletech/Lum ... cement.pdf

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Re: Lucent offering pension buyout to retirees: what to do?

Post by TradingPlaces »

VictoriaF wrote:
bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change.

*****However, it will lose the PBGC protection.*****

Victoria
Is that last part legal?

I too would like to get rid of my contractual liabilities without any consequences. Eliminating PBGC protection by doing some transactions does not seem to be legal. Not unless something else is offered in return to the beneficiaries. This is basic contract law.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

TradingPlaces wrote:
VictoriaF wrote:
bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
If Alcatel-Lucent sells the pension plan to an insurance company, it will be similar to buying an SPIA on an open market. I expect that the amount of the pension would not change.

*****However, it will lose the PBGC protection.*****

Victoria
Is that last part legal?

I too would like to get rid of my contractual liabilities without any consequences. Eliminating PBGC protection by doing some transactions does not seem to be legal. Not unless something else is offered in return to the beneficiaries. This is basic contract law.
Apparently it is legal because that's the way GM handled it. I don't know what discussions, if any, went on between GM and the government regarding this. Although I suspect Uncle Sam is probably more than happy to rid himself of responsibility for GM retirees.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Browser wrote:My brother-in-law is a retired manager from Lucent and told me today that he received a letter indicating that Lucent intends to terminate it's corporate pension program. As a previously retired employee he will be offered the option of a lump sum buyout of his pension or an annuity to be managed by an insurance company...
Parthenon wrote:The specifics to the Alcatel-Lucent plan can be found at http://files.cwa-union.org/teletech/Lum ... cement.pdf
Maybe your BIL’s letter has more detail, but I see nothing in here about the plan being terminated or transferred to an insurance company. It appears to be voluntary with one of the options being “do nothing”. Certainly the word ‘annuity’ is generously sprinkled throughout the document which may lead one to infer insurance company. But ‘annuity’ is used even when referring to the current pension.

Presumably more information will be forthcoming which will address this more clearly.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Bill M »

The devil is in the details.

But in general, the biggest risk is living a long time. The annuity is a clear winner, but you have to balance that against the risk of insurance company going bust.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

cheese_breath wrote:
Browser wrote:My brother-in-law is a retired manager from Lucent and told me today that he received a letter indicating that Lucent intends to terminate it's corporate pension program. As a previously retired employee he will be offered the option of a lump sum buyout of his pension or an annuity to be managed by an insurance company...
Parthenon wrote:The specifics to the Alcatel-Lucent plan can be found at http://files.cwa-union.org/teletech/Lum ... cement.pdf
Maybe your BIL’s letter has more detail, but I see nothing in here about the plan being terminated or transferred to an insurance company. It appears to be voluntary with one of the options being “do nothing”. Certainly the word ‘annuity’ is generously sprinkled throughout the document which may lead one to infer insurance company. But ‘annuity’ is used even when referring to the current pension.

Presumably more information will be forthcoming which will address this more clearly.
I believe he said that the letter stated that the annuity would be transferred to an insurance carrier outside the purview of Lucent's employee benefits program. I don't know for sure how these things work in the first place, but I'm assuming that company pensions for retirees are probably administered by an insurance carrier in the first place, but remain under the purview of the company benefits department which can change carriers and so forth. It appeared as if Lucent wants to cut the pension annuity loose and no longer have administrative responsibility. This is a parallel move to terminating all defined benefit pensions for current or recent employees in favor of a 401(k) program. My mother is still receiving co-beneficiary benefits from my father's "pension" which is now apparently an annuity being administered by Traveler's Insurance Co. It has passed from one insurance carrier to another over the years and the company my father worked for has become defunct.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by kaudrey »

TradingPlaces wrote:
VictoriaF wrote: *****However, it will lose the PBGC protection.*****

Victoria
Is that last part legal?

I too would like to get rid of my contractual liabilities without any consequences. Eliminating PBGC protection by doing some transactions does not seem to be legal. Not unless something else is offered in return to the beneficiaries. This is basic contract law.

Yes, it is legal. The company that sponsors the pension plan purchases annuities, thereby transferring the responsibility for payments to the insurance company. Therefore, the pensioner technically now has an annuity and not a pension plan, and he/she is no longer a participant in the pension plan, and is no longer covered by PBGC.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

Here's the paradox. Despite the fact that people don't want to buy annuities - preferring to be their own amateur investment managers - when offered the choice between keeping their current defined benefit pension vs. going to a 403(b) public employees in several states have strongly preferred the DB option (which is, of course, a deferred annuity option). It will be interesting to see what Lucent retirees do, if that information ever becomes public.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Mitchell777 »

For very old pensioneers, with no spouse and enough money to live on either way, wouldn't it often be best to take the lump sum since the pension cannot be passed on to non-spouse hiers?
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Browser wrote: I believe he said that the letter stated that the annuity would be transferred to an insurance carrier outside the purview of Lucent's employee benefits program. I don't know for sure how these things work in the first place, but I'm assuming that company pensions for retirees are probably administered by an insurance carrier in the first place, but remain under the purview of the company benefits department which can change carriers and so forth. It appeared as if Lucent wants to cut the pension annuity loose and no longer have administrative responsibility...
If the letter said that, then what you are saying sounds exactly right. Before GM terminated it's salaried pension plan it hired outside companies to handle the administrative processing, the last one being Fidelity. But GM still retained ownership and responsibility for the plan. But when it terminated the plan and passed it off to Pru it cut all ties.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Browser wrote:Here's the paradox. Despite the fact that people don't want to buy annuities - preferring to be their own amateur investment managers - when offered the choice between keeping their current defined benefit pension vs. going to a 403(b) public employees in several states have strongly preferred the DB option (which is, of course, a deferred annuity option). It will be interesting to see what Lucent retirees do, if that information ever becomes public.
I think it will be mixed. I and some others I know stuck with the annuity while some others took the lump sum.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Mitchell777 wrote:For very old pensioneers, with no spouse and enough money to live on either way, wouldn't it often be best to take the lump sum since the pension cannot be passed on to non-spouse hiers?
Sounds reasonable, but I'd still want to run the numbers before making a decision.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

Mitchell777 wrote:For very old pensioneers, with no spouse and enough money to live on either way, wouldn't it often be best to take the lump sum since the pension cannot be passed on to non-spouse hiers?
It all depends on the amount of the lump sum and the person's income needs. Since the value of both will be based on actuarial life expectancy and thus be smaller, the annuity guarantees a specific lifetime income, which the lump sum wouldn't. If the person has sufficient income without the pension income factored in, the lump sum offers the possibility of passing it to heirs. But if the existing pension income is significant for the person's living standard, he/she would probably be better off just taking the annuity. Why gamble with your living standard?
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Re: Lucent offering pension buyout to retirees: what to do?

Post by SGM »

If you are already managing a large sum in either taxable or tax advantaged accounts you might want an annuity to transfer the risk to an insurance company. The question then would be could you get a better rate if you shopped around and diversified among insurance companies. You could also do serial annuities over a period of a few years. I would also google what were the limits of state insurance guarantees. As I recall Florida and New York had limits a lot higher than most other states.

In a different situation despite the tax consequences we are considering annuitizing rather than transferring a sum to an IRA. I also like having multiple income streams and checks coming in on a regular basis. The risk of cognitive decline is also real and I have seen nest egg losses directly related to cognitive decline in family members and many other elderly folks. Annuities would have decreased but not necessarily stopped the losses completely for these people.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

SGM wrote:If you are already managing a large sum in either taxable or tax advantaged accounts you might want an annuity to transfer the risk to an insurance company. The question then would be could you get a better rate if you shopped around and diversified among insurance companies. You could also do serial annuities over a period of a few years. I would also google what were the limits of state insurance guarantees. As I recall Florida and New York had limits a lot higher than most other states.

In a different situation despite the tax consequences we are considering annuitizing rather than transferring a sum to an IRA. I also like having multiple income streams and checks coming in on a regular basis. The risk of cognitive decline is also real and I have seen nest egg losses directly related to cognitive decline in family members and many other elderly folks. Annuities would have decreased but not necessarily stopped the losses completely for these people.
You have a good point that by taking the lump sum you could annuitize part of that by purchasing an annuity with some of that amount. I don't believe that Lucent is offering the option of annuitizing a part and taking the other part as a lump sum, so you'd have to do that yourself.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Ketawa »

I don't know the specifics of this Lucent offer, but my personal opinion is that companies offer pension buyouts because it will save them money, on average. Why else would they make the offer? People have a behavioral bias in favor of large lump sums of money rather than annuities. Unless you have specific circumstances that make you meaningfully different from the average, keeping a pension is probably the better deal.

A similar thing is happening with the latest DoD proposal to reform the military retirement system. The plan calls for reducing the DB multiplier from 2.5% to 2.0%, i.e. a 20% reduction in the pension. In exchange, service members would get up to 5% matching contributions to the TSP throughout their career.

I ran some numbers and the value of the military pension at current interest rates is about $3M for an O-4 retiring at 20 years of service. That is how much it would cost to purchase a COLA indexed single life annuity from the TSP. To make up the $600k from a 20% cut, service members would have to be paid an average annual salary of $490k during a 20 year career to make up the difference with 5% matching contributions at a 2% discount rate.

I'll certainly be keeping the pension unless it becomes clear that I will get out before 20 years of service or suffer an early death.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

Ketawa wrote:I don't know the specifics of this Lucent offer, but my personal opinion is that companies offer pension buyouts because it will save them money, on average. Why else would they make the offer? People have a behavioral bias in favor of large lump sums of money rather than annuities. Unless you have specific circumstances that make you meaningfully different from the average, keeping a pension is probably the better deal.

A similar thing is happening with the latest DoD proposal to reform the military retirement system. The plan calls for reducing the DB multiplier from 2.5% to 2.0%, i.e. a 20% reduction in the pension. In exchange, service members would get up to 5% matching contributions to the TSP throughout their career.

I ran some numbers and the value of the military pension at current interest rates is about $3M for an O-4 retiring at 20 years of service. That is how much it would cost to purchase a COLA indexed single life annuity from the TSP. To make up the $600k from a 20% cut, service members would have to be paid an average annual salary of $490k during a 20 year career to make up the difference with 5% matching contributions at a 2% discount rate.

I'll certainly be keeping the pension unless it becomes clear that I will get out before 20 years of service or suffer an early death.
I'd be interested in the best way to run the numbers on the cost of purchasing an annuity with similar provisions to an existing pension. That would allow a better comparison of the value of staying with the Lucent annuity vs. taking the lump sum that is offered, IMO.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Ketawa »

Browser wrote:I'd be interested in the best way to run the numbers on the cost of purchasing an annuity with similar provisions to an existing pension. That would allow a better comparison of the value of staying with the Lucent annuity vs. taking the lump sum that is offered, IMO.
My example was specific to the TSP annuity vs military pension question, since the matching contributions would go into a TSP plan. The TSP also provides a way to calculate the cost of purchasing an annuity by hand using the folllowing resources linked from this page: https://www.tsp.gov/forms/allPublications.shtml

Annuity Factor, Monthly
Annuity Interest Adjustment Factor
Annuity Worksheet

...and the Annuity Rate Index: https://www.tsp.gov/whatsnew/rates/annu ... ndex.shtml

I made a spreadsheet to handle all the inputs and spit out a number. I checked my work with the TSP Retirement Income Calculator.

You could also use a resource like immediateanuities.com or price an annuity through Vanguard.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Ketawa wrote:I don't know the specifics of this Lucent offer, but my personal opinion is that companies offer pension buyouts because it will save them money, on average. Why else would they make the offer?
By getting that obligation off their books it makes them more credit worthy in case they want to borrow money to put into the business.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by FiveDriver »

I am also awaiting the Alcatel-Lucent Letter to see the details of their offer. The link posted above to the cwa UNION version of the letter could be substantially different than their so-called Management Pension, as these two pensions were always kept separate. The most recent mailing to the retirees about the current levels in the Pension Fund indicated that the Management portion was fully funded over and above the requirements. To wit --
"From an ERISA standpoint, which determines funding requirements in the US, the US pension funds remain in a sizeable surplus positive and we do not expect to make any additional contributions to these plan assets for the foreseeable future - See more at: https://www.alcatel-lucent.com/press/20 ... rZFTa.dpuf'

Also, the Lucent Retirees Org (LRO) has provided information to us on several ongoing issues -- check into their webpage http://www.lucentretirees.com/

I will wait to see their offer, but I have questions about --

1- What Mortality tables are they using ?? SS tables ?? 2008 GAAT ??

2- Tax Status in my state ?? South Carolina does not tax qualified pension payments.

3- Alcatel is a French company now.....can they arbitrarily change their rules on pensions ?? They seemingly want to take the surplus, lately said to be about $4B US, and start spending (or handing out executive bonuses).
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Browser »

cheese_breath wrote:
Ketawa wrote:I don't know the specifics of this Lucent offer, but my personal opinion is that companies offer pension buyouts because it will save them money, on average. Why else would they make the offer?
By getting that obligation off their books it makes them more credit worthy in case they want to borrow money to put into the business.
I'm waiting to see what all the states with massively underfunded public pensions are going to come up with. That should be fun.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Browser wrote: I'd be interested in the best way to run the numbers on the cost of purchasing an annuity with similar provisions to an existing pension. That would allow a better comparison of the value of staying with the Lucent annuity vs. taking the lump sum that is offered, IMO.
If you know the amount of the lump sum you ask the insurance companies what you can get for that amount. I'm sure there are sites on the Internet many of them are linked into.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by cheese_breath »

Browser wrote:
cheese_breath wrote:
Ketawa wrote:I don't know the specifics of this Lucent offer, but my personal opinion is that companies offer pension buyouts because it will save them money, on average. Why else would they make the offer?
By getting that obligation off their books it makes them more credit worthy in case they want to borrow money to put into the business.
I'm waiting to see what all the states with massively underfunded public pensions are going to come up with. That should be fun.
I don't know about the states, but you saw what happened in Detroit. The state chipped in some money, a foundation chipped in some money, and the pensioners still had to take a cut.
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Ron »

I faced a similar decision when I retired in early 2007. While my former company did away with its defined benefit (e.g. pension) plan back in the 80's, it replaced it with a cash balance plan ( http://www.investopedia.com/terms/c/cas ... onplan.asp ).

Upon retirement, I was given the option to receive either a lump sum or an annuity (single life SPIA, no term) through a third party that the company had contracted.

What I did was to see if I could get an SPIA on my own (funded by the lump sum) that met my preferred terms - that is with survivor coverage (at 100%) and a minimum term policy.

I received quotes from FIDO, VG, and through https://www.immediateannuities.com/ to see if my goals could be met. While the payout was a bit less than a single life no term policy (since I would be paying for "insurance on insurance") I did receive a quote that paid out an IRR of just under 5% (does not include repayment of premium paid), pays my wife/me at 100% on a survivor basis, and has a minimum term of our joint life calculation (at the time, 28 years). If neither survive that 28 year period, remaining payments go to our estate (at 100%).

As a result, I purchased the SPIA with a portion of the lump sum payout and invested the remainder. Eight years later, I'm still pleased with my decision. No, it is not COLA adjusted, but most (non-government) pensions act in the same way. Besides, it's allowing me income to delay SS until age 70 (2.5 years from now) and "trade up" to a superior annuity product while allowing the SPIA to be "icing on the cake".

FWIW,

- Ron
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Re: Lucent offering pension buyout to retirees: what to do?

Post by g$$ »

VictoriaF wrote: I will be in a better position to discuss it when I actually see the offer. This won't happen for a week, because I am leaving for the airport shortly.
Did you get the offer?

Plan sponsors are not required to give a lump sum offer to all participants. They can segment the population. It's possible that the decided to leave existing retirees alone and simply transfer your annuity to an insurance company.

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Re: Lucent offering pension buyout to retirees: what to do?

Post by g$$ »

bsteiner wrote:
lack_ey wrote:If the buyout amount is fair, he can always turn around and purchase his own annuities with that money (multiple, to spread out the risk among institutions).
The annuity from the pension plan will probably pay more than one that he can buy from an insurance company, though it won't be diversified among insurance companies.
+1

It will probably pay substaially more. Taking the lump sum with the intention to buy an annuity on the open market is almost guaranteed to be a losing proposition. You'll have to pay the insurance company for a profit load, admin expenses, and adverse selection. These would have all been paid by the pension plan if you had simply accepted the annuity in the first place.

-g$$
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Re: Lucent offering pension buyout to retirees: what to do?

Post by Frugal Al »

Browser wrote:Here's the paradox. Despite the fact that people don't want to buy annuities - preferring to be their own amateur investment managers - when offered the choice between keeping their current defined benefit pension vs. going to a 403(b) public employees in several states have strongly preferred the DB option (which is, of course, a deferred annuity option). It will be interesting to see what Lucent retirees do, if that information ever becomes public
The behavioral paradox in that most people view the act of turning cash over to an insurance company in exchange for a stream of payments that end upon death (usually) differently than receiving a DB pension, even when the present values are nearly equal. The pension is a perceived benefit to which they are entitled and is historically viewed in a positive way. For most people that is the way it should be, particularly if the pension is a significant part of their retirement cash flow. However, as we've pointed out in the past, the lack of flexibility on timing (usually starts at age 65), the inability to apply tax strategies, as well as one's personal expected longevity (and that of their spouse) all combine to make this a very personal decision. I personally like the option to take the lump sum--not everyone needs extra (nearly) guaranteed cash flow--but it's not for everybody.

Apparently they are using August 2014 segment rates, 1.24/3.86/4.96, (from the link provided by Parthenon) and they're using the RP-2000 mortality tables (no mandate to use newer tables yet). The rates aren't the lowest we've had in recent years. As with so many of the recent cases, if this is a significant part of the prospective retirees cash flow, it's probably best to keep the annuitized pension and take risk elsewhere in the portfolio. For smaller amounts it might be a good opportunity to take control of the lump sum. Options are good.
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