At Cordant, we work with number of corporate executives—especially the employees of Intel. As a result, we frequently receive questions regarding the Intel pension plan.
And for good reason—there are many factors to consider, and any pension plan can get complex. For many, it is one of the more difficult of corporate benefits to understand.
In this post, we aim to provide a general overview of pension plans and highlight a few specifics about the Intel plan. We will cover the following areas:
- How pensions work
- How benefits are calculated
- Considerations when choosing between monthly income or lump-sum distribution
- Recent changes to the Intel pension plan
How pensions work
The basic idea of a pension plan is fairly straightforward. A pension (also called a Defined Benefit plan) is a promise, funded by your employer, to provide a certain monthly income to you in retirement. While the system is seemingly simple, the nuances and details of each plan can sometimes make them confusing.
How are my benefits calculated?
The first step in learning about your pension is to understand how benefits are accumulated. If you have a pension, you have earned these benefits over the course of your working career. Typically benefits are calculated from some combination of: length of employment, age, earnings history, and estimated social security benefits.
Here we will walk through the factors involved in the Intel pension benefit calculation. While each company is likely to have their own calculation methodology for pension benefits, in general the process in fairly similar.
Intel Pension Benefit Calculation Factors
Final Average Pay
This denotes your average pay during highest earning years. Your estimated social security benefits are also used in the calculation—meant to provide a retirement benefit on the earnings not factored into your social security benefits.
Years of Service
Income multiplied by years of service.
Retirement Contribution (RC) Account Balance
Since Intel’s pension plan is a minimum benefit plan; your pension benefit is compared to the balance in your RC account. If your monthly pension benefit is greater than that of your RC plan, you will receive an additional pension benefit. If it is less, you’ll receive only the balance in your RC account.
The purpose of the minimum pension plan is to provide employees a minimum level of income in retirement, even if the RC plan falls short of doing so (usually due to investment returns).
The annuity factor is used to turn your RC account balance into a monthly income amount. The factor is determined based on your age (life expectancy) and the level of current interest rates.
The IRS publishes the rates used in pension calculations and splits them into three segments. The first segment is used to calculate payments due in the first five years, the second to discount payments due in years 6-20, and the third to discount any payment due after 20 years.
The annuity factor decreases as interest rates rise—meaning that the monthly income benefit would increase, but a lump sum distribution would decrease as rates go up.
A Choice at Retirement: Monthly Income or Lump-Sum Distribution?
Good news! Using the hypothetical example above, we have determined that you are eligible for a pension benefit. This benefit is in addition to the balance in your Retirement Contribution (RC) account.
At this point, you have a decision to make. Should you take your benefit as a monthly income, or a lump sum distribution? Some factors to consider:
- What is your tolerance for risk?
- What is your need for liquidity in retirement?
- What other assets and income are available? 401(k) and IRA accounts, taxable assets, and social security benefits should all be factored into the decision.
- Does your pension benefit adjust with inflation?
The calculation to determine the lump sum amount, based on your monthly income, is highly sensitive to interest rates. As interest rates rise, the current value of your future payments decreases. This means as interest rates move up, your lump sum benefit will decrease. The chart below provides an example.
We like to assess the lump sum question with sensitivity analysis—it helps to better understand when would you benefit from a lump sum distribution, and when would you be better off with the monthly income benefit.
The matrix below is a hypothetical example of a married couple at age 65. They have a choice between taking monthly income of $1800 per month (joint life income), or a lump sum benefit of $303,403.
Across the top of the table you can see the year, clients’ age, and their joint probability of reaching that age. Along the left side are portfolio returns ranging from 4% to 10% annually.
The cells shaded green (positive numbers) mean that in the resulting scenario, this couple would be better off with a lump sum distribution. The cells shaded red (negative numbers) mean that a monthly income would result in more total dollars to them over their lifetime.
As you can see, factors like low investment returns and living to an old age would favor taking the monthly income. However, if in this case you expect higher returns and/or a shorter life span, a lump sum distribution might be the better choice.
We help our clients make the decision that is best for them using a combination of this scenario analysis, a risk and objectives analysis, and a detailed retirement cash flow analysis that includes Monte Carlo modeling.
Recent changes to Intel Pension
As you’ve likely heard, Intel recently announced some changes to the minimum pension plan—expected to go into place on January 1, 2015. These changes will affect the pension plan, but do not affect the balance of your 401(k) or Retirement Contribution plan.
Our understanding of the changes for those eligible for pension benefits are as follows: years of service and future pay into the plan will be frozen. Essentially, the accumulation of benefits paid into the pension plan will be stopped—however your actual benefit at retirement will still be calculated, and subject to interest rates, retirement contribution account balance, and retirement age.
There are many factors to consider when looking at your Intel pension benefits, and no two cases are exactly alike. We hope this post helps you better understand these key factors and how the plan works.
 As of August 2014 the interest rates used for the first, second, and third tiers were 1.36%, 4.60% and 5.58% respectively. http://www.irs.gov/Retirement-Plans/Funding-Yield-Curve-Segment-Rates
 Based on the Social Security Administration Actuarial Life Table. http://www.ssa.gov/oact/STATS/table4c6.html