How IRS Segment Rates Can Impact Your Shell 80 Point Pension BRP Payout

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 the timing of their retirement, which impacts the calculation for their 80 Point Pension Benefit Restoration Plan. Poor retirement timing decisions often produce 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 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 must pay 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, Shell is likely 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 an employee loses because of pension contribution limits set by the IRS each year.

difference between shell 80 point pension and pension brp-02

 

Payout Differences Between the 80 Point Shell 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 distributed as a lump sum. When you retire, Shell pays your 80 Point Pension BRP as a lump sum approximately 90 days after your retirement date (or six months if you are considered a key employee).

Learning how these benefits pay out 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 to calculate 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, the September segment rates). Thus, the lump sum value is simply the present value of future estimated monthly BRP annuity payments as a one-time summation. Here’sHere’s an example of this calculation:

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 2022, Shell uses the September rates from 2021, and if you receive a pension payout at any time in 2023, Shell will use the September rates from 2022.

 

What are Segment Rates and How Do They Impact The Lump Sum Payout of the Shell 80 Point Pension BRP

Segment rates are rates provided by the IRS that companies use to determine specific payout amounts for employee deferred compensation plans. Segment rates are highly correlated to the movement of interest rates for short, medium, and long-term bonds respectively.

 After two years of extensive government spending to support Americans through the COVID-19 pandemic, inflation rose to a 40-year high of 8.6% in May of 2022 with no sign of slowing down. With the war in Ukraine, inflation, and other factors in play, the 10-year treasury rates reached a 2-year high of 2.475% on March 25, 2022. In June 2022, Federal Reserve Chairman Jerome Powell announced the largest interest rate increase since 1994 to slow down the economy and inflation while also signaling that rates could continue to rise. While the Fed continues to raise the federal funds rates, we’ve seen a corresponding increase in the 10-year treasury rates which play a significant role in the BRP lump sum calculation for Shell professionals.

Discover Stock Market Trends & Economic Analysis in our Recent Stock Market Update Here >>

To illustrate the impact of the movement in these rates, we can look at the difference between 2021 and what we expect for 2022 rates. With the economy shutdown in 2020, the segment rates came down drastically and made it much more attractive to retire in 2021. However, we’ve seen an abrupt spike in interest rates and the Fed forecasts continued increases, so keeping an eye on them as we approach September can help you plan when to retire.


2021 v 2022 - Shell 80 Point BRP Pension Lump Sum Payout Segment Rates-01
Note, lower interest rates mean a higher value for your Shell 80 Point BRP Pension lump sum.

 

So, how can changing your retirement date from December of one year to January of the following affect your payout, given the movement in segment rates?

 

Differences in BRP Pension Payouts in 2022 vs 2023

Shell Lump Sum Pension BRP Payout Example for 2022 Pension Elections

Let’s consider an example with a Shell employee choosing to retire in November of 2021.

a) 60-year-old retiring December 1, 2021

b) Pension starting January 1, 2022

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 example with a December 31, 2021 retirement date and a pension start date of January 1, 2022, Shell will use the segment rates from September 2021, then the value of the lump sum for a 2022 pension election is worth approximately $3,346,427. Remember, for any pensions starting in 2022, Shell will use the segment rates from September of 2021 0.70%, 2.55%, and 3.06%.

 

 

Shell Lump Sum Pension BRP Payout Example for 2023 Pension Elections

Let’s fast forward to 2022 when we’ve seen a considerable increase in segment rates. If we assume the Fed raises rates by approximately 1.75-3% across each segment from where they were in January of 2022 (1.41%, 3.02%, and 3.36%), and more in the short-term first segment, we can hypothesize what rates may look like in September of 2022 for Shell professionals choosing to retire at the end of the year 4.71%, 5.21%, and 6.31%.

For this example, we’ll change the Shell employee’s retirement date to 12 months later than the previous example.

a) 60-year-old retiring December 1, 2022
b) Pension starting January 1, 2023
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, which uses our hypothetical segment rates from September 2022, then the value of the lump sum BRP Pension paid out on January 1, 2023, is worth around $2,435,136. That’s a difference of over $929,000!

Why the huge difference? Segment rates in September 2021 were drastically low compared to the ones we expect to see in September of 2022. 

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 the basic time value of money. First, we must 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 to 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:

$2,435,136 = (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 80 Point BRP Pension Lump Sum Payout Segment Rates - 2021 v 2022-05

 

Looking forward, segment rates today are already higher than where they were in September of 2021 and we expect that they will continue to rise. It’s important for Shell professionals to keep an eye on these rates so they can make educated decisions about when to start their pension and receive BRP payouts without leaving money on the table.

Understanding the impact of appropriately timing your Pension BRP payout can significantly affect your retirement income. Still, 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, which means the Shell 80 Point Pension BRP is paid out within 90 days of retirement and immediately taxed for most retirees. You cannot roll your pension BRP over into your 401(k) or IRA. Additionally, you cannot elect to defer receiving proceeds from your Pension BRP over time (unless you have an Old Money contribution or made benefit elections before 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 considering retiring within the next 18 to 24 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 utilize.


We help our Shell clients looking at retiring in the next couple of years to analyze today’s segment rates to make the best election decision for their situation. Don’t overreact if you are looking at retiring in two to five years or are concerned about how rising rates may affect your Pension BRP payout. 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. Numerous employees at Shell have varying pension rules due to acquisitions, obtaining U.S. citizenship, being on the APF pension plan instead of the 80 point, and additional factors. Therefore, 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.