Which Syngenta Pension Option Should You Choose?
Deciding which pension option to take is a big financial decision. You get one chance to decide between two very different options for receiving a large sum of money. You can take a lump sum option and have all your money in hand immediately. Or you can take an income stream for the rest of your life. There are four risks to consider when evaluating this option. We will go through these and then discuss three different ways to analyze the decision.
Inflation Risk - Inflation is the general increase in the price of goods and services. It has been low for the last decade but that won’t always be the case. If you look back to the late 1970’s and early 1980’s, you will find a period when inflation was well into double digits. If you choose the income pension option, you are locking in a level stream of income for the rest of your life. Inflation will slowly erode the real value of that income.
The lump sum option isn't as exposed to inflation risk but it's still a risk. It's likely that you will invest part of that lump sum in bonds. These are currently paying low interest rates. If inflation exceeds the return on your bonds, it could reduce the real value of your lump sum. The return on stocks should exceed inflation over time but that won’t always be the case. Look at the 1970’s when US stocks underperformed inflation by 1.4%. Neither option is immune from inflation risk but the income option has more exposure to it.
Volatility Risk - One of the nice things about the income option is that it isn’t dependent on the stock market. There is no concern about volatility because it's stable. The check is deposited into your bank account like you are still working. This is regardless of whether the market is up 30% or down 30%. The lump sum is a different case. You will invest this money and expose it to stock market volatility.
Company Risk - If you take the lump sum option, this isn't a problem because you have all your money in hand. If you take the income option, you could be receiving this income for another 30-40 years. The fate of your income check will depend on the Syngenta pension trust fund. You will want to be aware of the funding status of the trust. Every year, the pension trust fund has to analyze what percentage of future payments it can fund. If the funding is low, Syngenta will need to contribute more money. In a worst case scenario, Syngenta isn't able to make contributions and the plan fails.
If this happens, the Pension Benefit Guaranty Corporation (PBGC) takes over the plan. The PBGC will guarantee a worker’s pension up to a certain amount based on the worker’s age when a certain event occurs. You can see the 2018 guaranteed amounts here. For reference, the PBGC will guarantee a single life annuity payment up to $5,420.45/month for a 65 year old. If your monthly pension benefit is above the PBGC guarantee for your age, this event may reduce your benefit. If your monthly pension benefit is below the PBGC guarantee for your age, this event shouldn't affect your benefit.
Mortality Risk - This risk is two sided. If you live for a long period of time, the lump sum option could run out of money due to poor market returns. The income pension option will last as long as you do so there is no risk that you outlive that option.
If you live for a short period of time, this is a risk for the income option. You need to live past a certain break-even point to at least receive what the lump sum would have been worth. If you don’t live past that age, it would have been more beneficial to take the lump sum.
Ways to Analyze the Syngenta Lump Sum Pension vs. Annuity Decision
Financial Plan - One way to analyze this decision is to run a financial plan with each scenario. This will allow you to analyze the results of each option. Is there a significant change in the result when comparing the lump sum to the income option? The income pension option usually has a slightly higher result but the plan ends with less in assets. If passing a certain amount to beneficiaries is important, you should take note of these results.
Internal Rate of Return - You can perform this analysis in excel. It answers the question of, "How much does the lump sum balance need to earn annually to equal the income benefit for a certain number of years?" The longer the time period, the more the lump sum would need to earn.
For example, a recent Syngenta retiree’s lump sum IRR result was the following:
The lump sum would need to earn 3.26% annually to equal 25 years of the 50% survivor income payments.
The lump sum would need to earn 4.18% annually to equal 30 years of the 50% survivor income payments.
The question to ask yourself is, “Do you think the lump sum can earn higher than that percentage over that period of time?”
Personal Preference - Sometimes it's not about how to make the most money. You also need to evaluate what will allow you to sleep at night. The first two options were very quantitative but this is also an emotional decision. Will guaranteed income help you be more relaxed and actually enjoy your money? Only you can answer that.
There is no clear answer for anyone but these are a few risks and considerations to take into account. Hopefully, they help you evaluate your decision. If you need some extra support or guidance, feel free to reach out here. I will try to get you pointed in the right direction.