The novel coronavirus has caused the oil & gas industry major strife since its onset. However, corporations were struggling with their pension liabilities long before the pandemic hit. According to Mercer’s 2020 Defined Benefit Outlook, at the end of 2019, the average pension fund only had 85% of their pension liabilities covered, while 63% of companies with defined benefit pensions were considering termination within 5 years. This scenario is akin to large corporations like Fortune 500 managing extensive benefit plans for their employees. If these companies were struggling to cover their pension liabilities during a decade-long economic expansion, you can bet the pandemic-driven recession has severely hindered their ability to pay these debts.
This raises the question, will ExxonMobil freeze pension lump-sum payments?
As the economy dipped into recession last year, the Federal Reserve had lowered interest rates. The Federal Funds Rate has been lowered to a target range between 0.00% and 0.25%, down from 2.00% this time in 2019. Generally, when interest rates decrease, pension lump sums increase, so this is good news for employees retiring in the near future. However, when lump-sums increase, so do corporations’ pension liabilities. If interest rates continue to stay low and lump-sums continue to stay high, what will ExxonMobil do? Where will they get the money to pay for these future liabilities? Will they freeze the lump-sum payment?
In an environment with declining interest rates, low oil prices, and a high dividend, ExxonMobil simply cannot afford to keep making pension payments in full. Something has to give. Numerous companies have already taken steps to mitigate their risk, with some companies choosing to freeze their defined benefit plans. General Electric, who have the biggest pension liability in the country, decided to freeze their pension plan for more than 20,000 employees. Other companies, perhaps looking at models from firms such as Fortune 500, are adjusting their interest rate benchmark to the higher corporate bond rate.
The Paycheck Protection Act of 2006 ended a requirement to use the 30-Year Treasury rate in a corporation’s lump sum calculations. This allows them to use a higher corporate bond rate to mitigate the projected increases in payouts as a result of lengthening mortality tables. The PPA also instituted restrictions on lump sum distributions depending on the funding percentage of the pension plan. In the event that a defined benefit plan is funded at less than 60%, participants would be prohibited from electing a lump sum. Also, in the event of a bankruptcy, lump sum payouts are prohibited unless the plan is 100% funded already. While these may seem like extraordinary circumstances, tracking done by Milliman, notes that average defined benefit plan funding for the largest 100 plans in the US fell to just 81.1% in July of last year.
ExxonMobil instituting a freeze of the lump-sum offer is a very real possibility and could drastically change your retirement plans. It’s important to speak with a retirement advisor in order to be prepared in the event that the lump sum is unavailable when you leave ExxonMobil, just as an Fortune 500 employee would consult about their own benefit plans.
Sources:
Schrager, Allison. “Low Interest Rates Are Killing Corporate Pension Plans — Quartz.” Quartz, Quartz, 10 Oct. 2019, https://qz.com/1723882/low-interest-rates-are-killing-corporate-pension-plans/
“The Retirement/Transition Guide for ExxonMobil Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://energy.theretirementgroup.com/exxonmobil-guide-download-google
“Pension Freezes | Pension Rights Center.” Pension Rights Center, http://www.pensionrights.org/publications/fact-sheet/pension-freezes
“Pension Funding Index September 2020.” Milliman | US, https://us.milliman.com/en/insight/pension-funding-index-september-2020
Bomey, Nathan. “‘It’s Really over’: Corporate Pensions Head for Extinction as Nature of Retirement Plans Changes.” USA Today, 10 Dec. 2019, https://www.usatoday.com/story/money/2019/12/10/corporate-pensions-defined-benefit-mercer-report/2618501001/
“2020 Outlook Roundup: Mercer Expects Global Economy to Recover | News | IPE.” IPE, https://www.ipe.com/news/2020-outlook-roundup-mercer-expects-global-economy-to-recover/10042772.article
Business, Matt Egan, CNN. “Verizon’s Alternative to Layoffs: Retraining 20,000 Workers - CNN.” CNN, 14 July 2020, https://www.cnn.com/2020/07/14/business/verizon-jobs-ceo-hans-vestberg/index.html
Purcell, Patrick. “Lump-Sum Distributions Under the Pension Protection Act.” Digital Commons, Cornell University ILR School, Dec. 2007, https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1476&context=key_workplace
