Pension Plan Changes Could Spell a Change of Plans

Julia’s first thought when the company announced changes to its pension plan was, oh boy, I’d better pay attention to this. Everyone at work is talking about how it was only a matter of time before the company reduced benefits in its generous defined benefit plan. She’s unsure whether it is a reduction at all, and how this change will affect her pension when she retires at 62, when her pension benefit maxes out. After reviewing the company’s technical guidance on the announced changes to the pension benefit formula calculation, she still feels uncertain about how it will affect the plans she has made for her family’s long-term financial stability.

As Senior Director of Global Commercial Strategy with a large public company, Julia has climbed the ladder one rung at a time over the last 26 years. Since the company announced changes to the pension formula, she finds everyone is in the same boat, scrambling to fully understand the changes and decode the meaning of the company’s broad-based and opaque communications on the subject.

What Julia knows is that the company plans to “freeze” the existing pension benefit five years from now. At that point, a new pension formula, a contribution annually of a fixed, double-digit percentage based on the employee’s earnings (i.e., salary and bonus), goes into effect. Julia is concerned whether the changes will affect her favorably or unfavorably.

She and Vince have two teenage children who mean the world to them – and need a solid start through college funding. Tiffany is two years away from entering a pre-med program followed by medical school. Three years later, Chad is likely to follow, though at 13 it is anyone’s guess where and what he may study.

She knows she’s very fortunate to work for a company which still offers a pension plan; very few companies do. She prides herself on understanding all the provisions, comparing alternatives and making informed elections when asked to do so. A pension election is an irrevocable decision, and she cannot afford to make a mistake. She reaches out to SFG Advisors, a wealth planning firm that specializes in advising senior executives on their long-term incentive plans, to help her make sense of her individual and family impacts, as well as to compare future pension benefit options over the long term.

The ability to take a lump sum distribution when she retires is an appealing feature. While there are many pension choices available, Julia is interested to see a couple of scenarios and has a few key questions to ask:

    Is she, in fact, better off with the new pension changes compared to the projections done previously? Under the new pension formula, should she plan to accept the lump sum or a monthly benefit instead? Will the changes result in a smaller overall contribution from the company? How best can she deploy her long-term incentives?

Julia wants to make sure she’s prepared should she need to retire before her ideal retirement age of 62, due to factors outside of her control. She’s overwhelmed by all the moving pieces in her financial plan, including future college expenses, when/how to exercise her stock options, how to best deploy her LTI upon vesting, and how to maximize employer contributions in her deferred compensation plan - and the pension change feels like one more cloud of uncertainty.

The solution: Julia asks SFG to help her interpret the pension changes and chart a course forward for her and her family. Her SFG financial advisor conducts scenario planning and can show Julia the financial impact of making one pension election decision versus another, as well as whether choosing the lump sum option under the new pension formula makes sense.

*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

Executive Compensation, Retirement Planning, Stock Options

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