Does anyone have any reliable information about the level of funding in the Chevron Retirement Plan? Is there any risk that the plan will come up short with an avalanche of planned and unplanned retirements and likely lump sum payouts in the coming months and years?
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The previous poster is correct in that the lump sum amount will diminish as corporate bond interest rates go up. The annuity amounts works inversely in that they increase when interest rates go up. Keep present the pension formula has a discount factor called the Early Retirement Factor that reduces your benefit by 5% per annum before the age of 60. What that means is if you retire before age 60, your lump sum amount is reduced. To keep up without losing money, you would need to invest it where you would earn at least 5% annually. Add to that another 2% just to keep up with inflation. Where in this market correction could you safely invest your pension nest egg to make a 7% annual return until you are 60 years of age? Risky, right? Also, anywhere you invest that money will incur a management fee and perhaps other costs that must be considered. If you are younger than 60 when you retire from Chevron, your investment choices become more difficult.
Thanks for the detailed responses, as I undertand it Chevron's retirement plan is pretty healthy now, but chevron could elect to stop or reduce funding going forward so that it could become under funded in the future, but that would probably not be concern for some one retiring and taking a lump sum in the next three to five years, although higher interest rates are a significant threat to the size of lump sum.
Sorry if there are typos in these posts as I am using my phone.........So do you take lump sum or ride Chevron payout pension plan wave hoping it takes you through your retirement plan. Again most people including many financial planners are not aware of the Pension Protection Act of 2006 which took effect in 2008. The lump sum no longer uses the 30 T bill interest rate but the composite corporate bond rate when taking a lump sum and the difference depending on the two rates can be dramatic. Looking quickly its around 1 and half points now, but will rise imo as they always do in economic uncertainty, which we have seen with the slowdown of the world economy. phasing out their use of a Treasury-bond rate to calculate lump sums and replacing it with a higher composite corporate-bond rate. The result: substantially lower payouts to employees who are changing jobs, being laid off or retiring—anywhere from 10% to 60% or more, depending on age and other factors. On MSNBC they were predicting interest difference between T's and corps to be at 2008 levels as the markets correct themselves. So what does that mean. Let me steal and example.Consider a 40-year-old who has earned a pension worth $3,000 a month at age 65. If the new rate had been used in December 2008, when the spread between corporates and Treasuries was a steep 3.77 points, his lump sum would have shrunk from $242,839 to $71,148........................................................................BTW in any company HR handles this. So ask your HR business partner lol. I encourage everyone to look at this very seriously as we are going to see a big margin between corps and T's.
Retirement Plan funding is a major concern, especially when it comes to the rules set forth in the PPA (Pension Protection Act). The previous poster mentioned several of the concerns. After Jan 2016, the IRS is expected to adopt the newest Mortality Tables published in 2014 by the Society of Acturaries (SOA). This will have a negative affect on all pension plans, as the liabilities of funding will go up between 3-8% to account for the population living an average of 2 more years, compared to the previous mortality tables that are currently used. The Chevron Retirement Plan won't go bust, but funding problems with bring changes to it. Remember that Chevron does not hold the investments of the pension plan. The funds are held by an outside trustee. Chevron simply is obligated to fund it with free cash flow. When there is a squeeze, Chevron could elect to eliminate the pension, going forward, or change the rules.
Great question and this is probably one of the most tricky part of any financials to navigate. Pension plans are not explained in the three main financial statement BS, IS, CFS. It is in the annual 10K. Her is chevrons from last year (SCROLL DOWN TO NOTE 22). Also the finance world uses. the funded ratio for looking into the health of the fund. The magic number is 80%, Chevron is at 78% and will be over 80% imo. Lets take a look at Chevrons investment mix for funding the pension. The asset allocation as of Jan. 1 2015 for its U.S. pension fund was 59.7% equities, 24.9% fixed income, 12.3% real estate and 3.1% cash and other. If the stock market keeps tanking this is a very real problem with a 60% stake of the pension in the market. Also actuarial accountants did not bank on Chevron firing 30% of it's employees which will push demand on the fund to new levels. GO TO YOUR FINANCIAL ADVISOR TO DECIDE IF YOU WANT TO PULL OUT YOUR MONEY ASK FOR PENSION SPECIALIST.......ALSO I WILL POST IN A NEW POST WHY TAKING A LUMP SUM CAN F YOU. But here is why it is very difficult for the lay person to understand the health of a pension. Three things make pension fund accounting complicated. First, the benefit obligation is a series of payments that must be made to retirees far into the future. Actuaries do their best to make estimates about the retiree population, salary increases and other factors in order to discount the future stream of estimated payments into a single present value. This first complication is unavoidable..........................................................................................................................................................................................................................................................................Second, the application of accrual accounting means that actual cash flows are not counted each year. Rather, the computation of the annual pension expense is based on rules that attempt to capture changing assumptions about the future...................................................................................................................................................................................................................................................................................Third, the rules require companies to smooth the year-to-year fluctuations in investment returns and actuarial assumptions so that pension fund accounts are not dramatically over- (or under-) stated when their investments produce a single year of above- (or below-) average performance. Although well-intentioned, smoothing makes it even harder for us to see the true economic position of a pension fund at any given point in time.