Lump Sum Pension
From the Wall Street Journal:
"Rising interest rates are adding to companies’ borrowing costs and triggering higher credit-card bills for consumers. At KFC, they are driving a turnover in senior management.
The Louisville, Ky.-based brand’s U.S. chief operating officer, chief financial officer and national field operations director have all notified Yum Brands Inc. KFC’s parent, that they will leave the chicken chain at the end of next month, according to company messages viewed by The Wall Street Journal.
Yum in an internal message to employees and franchisees attributed the departures to rising interest rates’ impact on its company pension plan. “Because of these interest rates, some associates across Yum! and its brands who qualify for pensions have decided to retire in 2022,” KFC wrote in one of the messages. A Yum spokesman said that a small number of U.S. employees were enrolled in the pension plan, which was closed to new participants in 2001. Most of them have decided to continue with the company rather than pursue retirement this year, and retirements are an expected part of business operations, he said. The size of lump-sum payouts in corporate pension plans depends on what are known as Internal Revenue Service-set segment rates, which are affected by benchmark interest rates. As interest rates climb, it can be financially beneficial for an employee later in their career to retire and take the lump sum before potentially escalating segment rates reduce the payout."
The piece goes on to tell the story of a Ford executive who is seeing their lump sum pension reduced as a result of higher rates from $1m to $700k, a difference of $300k (real money!) In many cases, it does represent a big enough number to walk away. But that decision should be limited to those who were already on the precipice of retirement. Perhaps that $300k gap offsets the portfolio reduction that took place in 2022, providing the additional confidence that they need to leave.
In the context of a comprehensive financial plan, other factors may actually make it prohibitive to take the higher lump sum and leave. Don't overreact to a reduction in the lump sum pension in the event you haven't hit a wealth accumulation target or aren't ready to walk away in general.
Nick Maggiulli wrote a good supplemental piece here. If your pension recalculates benefits on an annual basis, there could be a lag time before the lump sum reduction takes place. Many that I work with do not, and therefore have already had reductions take place. If you've already missed that window, assess the new landscape and move forward accordingly.
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Sources:
Senior KFC Executives Opt for Retirement as Interest Rates Hit Pension Payouts (Wall Street Journal)
Why You Might Want to Retire Soon If You Have a Pension (ofdollarsanddata.com)
