Your Shell 80 Point Pension BRP Could Increase by Over $250K by Retiring 31 Days Later

Many of Shell’s high-income-earning executives don’t fully understand the differences between their numerous benefits, especially those related to their pension.  Many who have spent their entire careers at Shell improperly manage when they take their Shell 80 Point Pension and their 80 Point Pension Benefit Restoration Plan. This often produces one of two results:

  1. The executive chooses a date that has significant tax consequences, or
  2. The executive chooses a payout date and elections that can save them hundreds of thousands of dollars—especially for those that are planning on retiring in the near-term.

To learn how to avoid these costly mistakes and get the most from these two plans, let’s dive into the details and payout considerations so you can be fully equipped when the time comes to make your elections for each.

Understanding the Differences Between Your 80 Point Pension & the Pension’s Benefit Restoration Plan (BRP)

Shell 80 Point Pension
Many of our Shell clients are familiar with the 80 Point Pension the company offers. This defined benefit retirement plan uses your age, years of service, and average final compensation to determine a payout amount that Shell will pay you in your retirement. The Shell 80 Point Pension is required to be paid out as an annuity.

Shell 80 Point Pension Benefit Restoration Plan (BRP)
If you are a highly compensated employee of Shell Oil and are on the Shell 80 Point Pension, it is likely that Shell is making separate contributions to the Shell 80 Point Pension BRP on your behalf. The 80 Point Pension BRP is a non-qualified plan that allows Shell to restore benefits that a

difference between shell 80 point pension and pension brp-02

Payout Differences Between the Shell 80 Point Pension & the Shell 80 Point Pension BRP

While your Shell 80 Point Pension must be taken as an annuity, your 80 Point Pension BRP is categorized and calculated differently according to regulations by the IRS to determine its value. When you retire, Shell pays your 80 Point Pension BRP as a lump sum approximately 90 days after your retirement date (or 6 months if you are considered a key employee).

Learning how these benefits payout upon retirement is a crucial step in retirement planning. Learn more here >>

 

How to Calculate the Shell 80 Point Pension Benefit Restoration Plan (BRP)

Most of our Shell clients do not realize that recent interest rates can impact the value of their employee benefits for retirement. Specifically, Shell uses the segment rates from September each year in their calculation for the Shell 80 Point Pension Benefit Restoration Plan (BRP).

To determine the value of the 80 Point Pension BRP lump sum, we need to calculate a summation of all future theoretical BRP annuity payments over the employee’s estimated life expectancy and discount it by the applicable interest rate (or in this case, September segment rates). The lump sum value is simply the present value of future estimated monthly BRP annuity payments as a one-time summation. An example of this calculation can be found below:

PV = (PMT1/(1+r)1) + PMT2/(1+r)2 … PMTN/(1+r)N
PV = Present Value or “Lump Sum Value” in today’s dollars
PMT = Projected annuitized payment amount
R = Rate of return or “Segment Rate”
N = Number of Years remaining in life expectancy

When calculating the lump sum payout for the Shell 80 Point Pension Benefit Restoration Plan (BRP), Shell uses the September segment rates from the previous year. If you receive a pension payout at any time in 2020, Shell uses the September rates from 2019, and if you receive a pension payout at any time in 2021, Shell will use the September rates from 2020.

 

What are Segment Rates and How Do They Impact Your Shell 80 Point Pension BRP

In 2019, we saw the first Fed Funds rate drops in over a decade with forecasts of a third rate drop before the end of the year. In response to the COVID-19 virus’ impact on the economy, the Fed cut interest rates down to 0-0.25% as a way to encourage the flow of credit to consumers and small businesses. With the spread of the coronavirus affecting the global economy, we saw our first recession-like correction since 2008. However, concerns of an increase in bond defaults and a lack of liquidity pushed rates back up in March to the highest levels since July 2019. The Fed again stepped in and flooded the bond market with $1 trillion in liquidity. Interest rates dropped in kind by hitting record lows across every segment in July 2020. Normally, we would see the segment rates follow suit and fall as well. While we cannot be certain where rates will go, many economic officials have indicated that rates will remain low for the next few years until inflation rises consistently. With the volatility and drops in the market in 2020, the rates in September 2020 are substantially lower than the segment rates in September 2019. This movement in rates from September 2019 to September 2020 is going to significantly impact the value of pension BRP lump sums for our Shell clients retiring in the 2021 year.


Shell 80 Point BRP Pension Lump Sum Payout Segment Rates- 2019 v 2020
Note, lower interest rates mean a higher value for your Shell 80 Point BRP Pension lump sum.

 

So, how does changing your retirement date from December of one year to January of the next affect your payout given the drop in segment rates?

 

Differences in BRP Pension Payouts in 2020 vs 2021

Shell Lump Sum Pension BRP Payout Example for 2020 Retirees

Let’s re-run the above example and change the Shell employee’s retirement date to be 31 days later than the previous example.

a) 60-year-old retiring November 30, 2020

b) Pension starting December 1, 2020

c) Average Final Compensation is $600,000

d) Thirty Years of Service with Shell

e) The value of both the traditional 80 Point Pension and Pension BRP is worth $24,000/month

f) Net benefits is showing a traditional 80 Point Pension of $9,200/month

g) Life Expectancy is 83.2 years

If we run the math on the above example, then the value of the lump sum BRP Pension is worth around $3,063,097.

Let’s briefly walk through how the math works to perform a rough calculation of the estimated value of the BRP Pension lump sum.

Essentially, it comes down to basic time value of money. We need to calculate a summation of all future theoretical 80 Point Pension BRP annuity payments over the employee’s estimated life expectancy discounted by the applicable rate (segment rates). This calculation gives us a lump sum value equivalent of these theoretical annuity payments Remember, the 80 Point Pension is taken as an annuity, but the 80 Point BRP Pension must be taken as a one-time lump sum payment.

 

PV = PMT1/(1+r)1 + PMT2/(1+r)2 … PMTN/(1+r)N.

PV = Present Value or “Lump Sum Value” in today’s dollars

PMT = Projected annuitized payment amount

R = Rate of return or “Segment Rate”

N = Number of Years remaining in life expectancy

For our example, an overly simplified version of this equation might look something like this:

3,063,097 = (14,800)1 / (1+2.13)1 + (14,800)2 / (1+3.07)2 … (14,800)13.2 / (1+3.65) 13.2

The subscripts reflect each year remaining in the individual’s life span and the calculation is run per month in each year over the 13.2 years used to calculate the lump sum.


Remember, as interest rates go up, the pension value will go down, and vice versa.

 

Shell Lump Sum Pension BRP Payout Example for 2021 Retirees

Let’s re-run the above example and change the Shell employee’s retirement date to be 31 days later than the previous example.

a) 60-year-old retiring December 31, 2020

b) Pension starting January 1, 2021

c) Average Final Compensation is $600,000

d) Thirty Years of Service with Shell

e) The value of both the traditional 80 Point Pension and BRP Pension is worth $24,000/month

f) Net benefits is showing a traditional 80 Point Pension of $9,200/month

g) Life Expectancy is 83.2 years

If we re-run the example with a December 31, 2020 retirement date and a pension start date of January 1, 2021, then the value of the lump sum is worth approximately $3.44  million—that is a difference of over $375,000!

shell 80 point brp pension payout - 2020 v 2019
Simply by retiring 31 days later, this Shell employee could potentially earn hundreds of thousands of dollars!


Understanding the impact of appropriately timing your Pension BRP payout can have a massive impact on your retirement income, but there’s another dark horse to keep in mind when doing your financial planning around it – Taxes.

Tax Impact of Your 80 Point Pension Benefit Restoration Plan Payout

The Shell 80 Point Pension Benefit Restoration Plan is a non-qualified pension plan, meaning it does not receive the same preferential tax benefits as your qualified pension, the Shell 80 Point Pension. 

 

The Shell Pension BRP is immediately taxed at distribution. For most retirees, this means the Shell 80 Point Pension BRP is paid out within 90 days of retirement and immediately taxed. You cannot roll your Pension BRP over into your 401(k) or IRA. You cannot elect to defer receiving proceeds from your Pension BRP over time (unless you have an Old Money contribution, or made prior to benefit elections in 2007).

 

Learn How You Could Save Over $50,000 in Taxes on Your BRP Payout

 

Who Can Benefit from This Shell 80 Point Pension BRP Strategy?

For Shell employees who are considering retiring within the next 18 months, or those who can retire at an earlier date, looking at segment rates to maximize your 80 Point Pension BRP payout can be a great strategy to take advantage of.


We help our Shell clients who are looking at retiring in the next 18 months to analyze today’s segment rates so they can make the best election decision for their situation. If you are looking at retiring in two to five years, or are concerned about how rising rates may affect your Pension BRP payout, 
don’t overreact. The value of your pension will increase by working longer and no one knows exactly how rates will change over time.

 

This strategy may not fit those taking voluntary severances as Shell may have requirements for their termination date, and the severance can be worth a substantial amount as well.

 

Before you make any decision, we recommend you work with a fiduciary financial advisor and seek confirmation about your various pension benefits and choices from Shell HR. There are numerous employees at Shell who have varying pension rules due to acquisitions, obtaining U.S. citizenship, being on the APF pension plan instead of the 80 point, as well as additional factors. It is best to confirm how your retirement date affects your pension before making any decisions. Of course, taxes, other financial assets, personal goals, and financial needs all come into play. That’s why we perform a comprehensive assessment with our clients, instead of simply looking at one item. 

 

If you have questions about your Shell benefits and would like to get a second opinion, contact one of our advisors who specialize in helping Shell employees make the most of these retirement savings tools.

 

 

 

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.