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’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 2023, Shell uses the September rates from 2022, and if you receive a pension payout at any time in 2024, Shell will use the September rates from 2023.

 

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.

Rates continue to climb in 2023.  The 10-year Treasury ended 2022 at 3.88% in-part due to the Federal Reserve raising short-term lending rates to their highest level since December 2007 in order to help combat inflation.  On October 19, 2023, the 10-year treasury closed at 4.988% as economic data including GDP and the jobs market, remain strong.  Additionally, the U.S. government continues to flood the market with new government bond issuance.  The 10-year treasury rates 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 2022 and 2023 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. In September, we saw continued increases, which can play a significant role in Shell professionals’ BRP calculation and determining when to retire.

 

Segment Rates Impacting a Shell 80 Point BRP Pension Lump Sum Payout
Month/Year 1st Segment 2nd Segment 3rd Segment

September
2022

4.48% 5.26% 5.07%

September

2023

5.58% 5.66% 5.56%

 

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 November of one year to December of the same year affect your payout, given the movement in segment rates?

 

Differences in BRP Pension Payouts in 2023 vs 2024

Shell Lump Sum Pension BRP Payout Example for 2023 Pension Elections

Let’s consider an example of a Shell employee choosing to retire in November of 2023.

a) 60-year-old retiring November 1, 2023

b) Pension starting December 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 $10,600/month

g) Life Expectancy is 83.2 years

If we run the example with a November 1, 2023 retirement date and a pension start date of December 1, 2023, Shell will use the segment rates from September 2022. The September 2022 segment rates were 4.48%, 5.26%, and 5.07%. In this scenario, the value of the lump sum for a November 2023 pension BRP election is worth approximately $2,223,713.

 

 

Shell Lump Sum Pension BRP Payout Example for 2024 Pension Elections

Let’s fast forward and assume you want to retire at year-end.

In September 2023, the Fed continued raising interest rates across each segment. The resulting segment rates were 5.58%, 5.66%, and 5.56%. This increase in segment rates has a big impact on the lump sum calculation even if no other factors change.

For this example, we’ll change the Shell employee’s retirement date to just one month later than in the previous example. 

a) 60-year-old retiring December 1, 2023 

b) Pension starting January 1, 2024 

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 $10,600/month given the IRS pension limit increase  

g) Life Expectancy is 83.2 years 

If we run the math on the above example using the September 2023 rates, then the value of the lump sum BRP Pension paid out on January 1, 2023, is worth around $2,081,539. That’s a difference of over $140,000!

Why the huge difference? Segment rates in September 2022 were lower compared to the ones we saw in September of 2023. 

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:

 

$2,081,539 = (13,400)1 / (1+5.58)1 + (13,400)2 / (1+5.66)2 … (13,400)13.2 / (1+5.56)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 - Retiring earlier may earn you more

 

Looking forward, segment rates today are higher than in September of 2022, and we expect that they could continue to rise through the rest of 2023. It’s essential for Shell professionals to keep an eye on these rates to 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 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 earlier, 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 also be worth a substantial amount.

 

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 want 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.