Why Optimizing Your BP Pension Comes Down to Timing

After decades of hard work, your retirement is just around the corner. The next few months require thoughtful planning, along with decisions that can affect your long-term financial future. This new chapter is a significant time in your life. You may not have considered why the actual date you choose to retire can be significant, too.

As a BP employee, it’s essential to understand the savings and investment options available to you, as well as the various effects they can have on your pension. The BP Pension Retirement Accumulation Plan (RAP) presents two options: annuity and lump sum payout. In our recent webinar, “How to Balance Your BP Retirement Options, we described these options, as well as why your benefit start date is critical.

A matter of a few months can be all it takes to significantly affect the total pension amount you receive. In this article, we’ll explain how your RAP lump sum is calculated and distributed, so you can select a retirement date that’s strategic and profitable.

 

What data is used to calculate your BP pension?

Your pension is based on your last date of employment and benefit start date. The IRS regularly releases spot segment rates that are used to calculate the RAP lump sum — and have an inverse relationship with a lump sum pension. When interest rates increase, lump sum pension values will decrease, and vice versa.

While other factors are involved in calculating your pension, it’s useful to review recent interest rates to begin to estimate how your lump sum might be affected. How rates are trending could be a definitive — and lucrative — factor in the date you choose to retire.

Note, if you were a participant in the BP RAP before January 1, 2014, your lump sum pension is determined by the segment rates.

 

How does BP calculate the lump sum amount you should receive?

The calculation is fairly complex, but the following charts will give you an idea of the rates used to calculate your BP RAP pension lump sum, and how they can affect the total pension funds available to you.

Once BP employees choose the date they would like their pension to begin, BP refers to the rate from four months prior to calculate the pension disbursement.

For example, if you retired and began taking your pension in October 2021, BP would have used the rates posted for June 2021 (four months before your retirement month).

Segment Rates - BP Lump Sum Calculation - October 2021

If you plan to retire this December, BP will use the rates posted for August 2021.


Segment Rates - BP lump sum calculation- december 2021

The segments refer to distinct periods of pension distribution:

  • The first segment rate is used to discount (calculate the present value) the first five years of pension cash flow.
  • The second segment rate is used to discount years six through 20 of pension cash flow.
  • The third segment rate is used to discount years 21+ of pension cash flow.

Together, these rates and terms are used to calculate the lump sum pension value.  

 

Why do these rates matter?

As shown above, making even a slight adjustment in your retirement date, or electing a month with historically lower segment rates, can significantly impact your lump sum pension calculation. These differences could mean choosing to wait longer to retire and begin taking your pension.

Consider this example:

  • Your estimated monthly RAP benefit is $7,000.
  • You retire at 65.
  • The life expectancy BP uses to calculate your pension is age 85.

Below is your estimated lump sum based on the month you choose and using the segment rates listed above. (This does not include the five percent annual crediting to your pension benefit.)

Lump sum in October 2021: $1,432,135*
Lump sum in December 2021: $1,459,281*

What a difference two months can make approximately $27,000!

*Reference example is based on assumed actuarial factors and actual 2021 segment rates. Actuarial Factors for the BP RAP pension will likely vary. Specific illustrations should be obtained from your NetBenefits portal.

BP Timing Pension Lump Sum Graphics-02


How can you plan strategically to select the most advantageous pension calculation time frame?

There are various trends you can evaluate to help you plan the best date for your retirement, including reviewing rates published by the Treasury Department.

  • Segment rates correlate with U.S. Treasury rates. When Treasury rates are on the rise, segment rates will increase accordingly. And, as mentioned, rising interest rates mean a lower pension calculation.
  • By looking back over 12 months and reviewing predictions, you may be able to get an idea of which direction rates will head in the future. As an example, if during the past several months, rates have trended upward, pension calculations are negatively affected.
  • Time your retirement date to take advantage of the best rate/pension scenario. The look-back window allows you to set a time that’s most financially appealing to you. For example, if you intend to retire during the summer, you can review rates from March 2021 or April 2021 to determine if and when it’s financially advantageous to retire.

BP Timing Pension Lump Sum Graphics-01


What's the outlook on segment rates, and how should you choose your retirement date?

Several factors affect the direction of interest rates and segment rates in particular. In addition to U.S. Treasury rates, another major influence is the short-term Federal Funds Rate established by the Federal Reserve. 

At the beginning of 2021, we saw the economy begin to open up following tailwinds of pent-up demand, low interest rates, and the distribution of the COVID-19 vaccine. As a result, segment rates rose for three consecutive months before hitting a high in March 2021. When the Delta variant became more prevalent during the summer months, we saw both segment rates and the economy begin to stall. This continued volatility led to the September 2021 rates being only slightly higher than the September 2020 segment rates.

While we cannot be certain where rates will go, keeping an eye on them you approach your desired retirement date can help you plan for the best payout.

For many executives at BP, taking their lump sum pension in November or December could mean a substantially higher payout than if they decide to wait until the spring of 2022. 

Back in the spring of 2020, the Fed significantly increased its spending (approximately $2.9 trillion in less than three months) to shield the economy from the devastating chaos caused by COVID-19. We believe rates will remain depressed (as compared against 2019’s rates) for the foreseeable future until we reach the Fed's targeted long-run inflation rate of 2%. While the Fed announced in 2020 that interest rates would be held low to meet average inflation of 2%, as headline inflation (CPI) climbed to 5% in July and August of 2021, many Americans are concerned about what that can do to retirement payouts. Additionally, Federal Reserve Chairman Jerome Powell announced that keeping interest rates low was a part of the same strategy. Segment rates are based on broad market interest rates, which have declined sharply since late 2018 -- whether you’re looking at short-term rates (segment 1) or long-term rates (segment 3).

Segment rates are lower than we've seen in over a decade, but trends and leading indicators point to an upcoming climb. It’s crucial to be keeping an eye on these rates to determine which retirement date can maximize your lump sum pension amounts.

Making your lump sum election is not your only decision when it comes to retirement planning. There are many factors involved in deciding when to retire and how you elect your benefits. Our expert wealth advisors are experienced in counseling BP professionals and executives. We provide clarity and confidence so you can make the best overall choices for you, your family, and your legacy. Allow us to guide you through your savings and investment options so you’re financially prepared for your retirement.

 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.