First, what is a segment rate?

A segment rate is based on the corporate bond rate yield curve – in other words, the change in corporate loan interest rates. When interest rates go down, as they did for the past few years, then the amount a pension lump sum has to be adjusted to to make up for the lower interest rates, goes up. When interest rates go up, as they did in 2022, then the amount paid out in a pension lump sum can go down.

There are three segment rates – creatively named first, second, and third. Those loosely correspond to short, intermediate, and long term bonds. Pension lump sum calculations are often particularly sensitive to the second segment, that corresponding to intermediate term bonds. So when the interest rate on intermediate term corporate bonds goes up, the value of a pension lump sum goes down.

Most pensions use the segment rate published in October (from September data); here’s the one published October 17, 2022. You can also look at historical segment rates here.

Can I calculate the impact of the change?

Nope. Formulas for pension calculations are not publicized, and every company has their own formula. Without the formula, we can can’t do the calculation ourselves.

Will I be working for free?

It’s a common question to wonder – will my pension lump sum value drop so much that I would be working for free in 2023? It seems like an over the top, inflammatory question, to the point of hyperbole, but let me tell you it can happen.

What would I need to do?

The September segment rate data, released in mid-October, is the basis for the lump sum calculations. Typically lump sum calculations are re-done annually, accounting for the change in segmentation rate are done between that mid-October and November. That information is released to employees in mid to late-November of each year, and the impact affects anyone who collects their lump sum January 1 of the following year or later.

But, you likely have to have retired/separated from service in a prior month before you can collect a lump sum.

Putting those pieces together means you have to retire in early to mid-November, and take your lump sum in December, to avoid being pushed into the lump sum value calculation that takes effect in January. If you have a lot of PTO to burn down, a moral or contractual requirement to provide substantial notice of your intention to depart, or an HR requirement for time to process your separation and lump sum payout request, expect it may not be possible to meet that timeline once you have the actual data in-hand.

That leaves us in the un-enviable position of making decisions only semi-informed.

What extremes have been encountered?

A week and a half ago, employees shared with me stories of their employer contacting them with warnings that the penalty of the interest rate environment change would be up to a 38% loss. That seems like a jaw-droppingly large number. That email gave those employees time to make decisions and take retirement yet this month if they wanted to. Kind of the employer to share that information.

But now today came my own personal experience, as those numbers were finally available. I’ve heard a few brave others who were willing to share say theirs were cut 31-38%. Mine is the loss of 53%, and that’s not a typo – 53% of my pension lump sum value, a full year of post-tax income. So yes, since I don’t carry any significant employer benefits for our family, in 2023 that amounts to me working for free.

What should I do now?

It’s likely too late to do anything for 2022. Nobody can tell you exactly what will happen to your pension lump sum until that calculation is made, and the timing is problematic. However, if you haven’t already heard for your own lump sum, that lump sum is likely to take at least a moderate hit with this year’s integration of the current segmentation rates. If you can’t or won’t be able to leave before the end of November, it can be worthwhile scouting to wait until you can get new estimates of the impact in January before you commit yourself to a December separation of service with an unknown January pension lump sum value.

What should I do in the future?

For the future, there’s no crystal ball here. Employers who offer a pension with a lump sum choice are not tied strictly to the segmentation rate. They have to have a plan, and a formula – but it’s only based on the segmentation rate, not strictly a copy of the segmentation rate. That means that nobody can tell you what the exact impact on your own lump sum will be in any given year.

However, there are two pieces of information you may have. First, you may have been tracking your pension lump sums over the past few years. The more your lump sum value jumped around the turn of the year the last two years, compared to prior years, the more sensitive your pension lump sum is to the segment rate decreases (and therefore likely to the segment rate increases). Second, you may have friends in the retiree pool from your same employer, who can tell you what happened to their own lump sum values when prior segmentation rate increases hit.

How did your pension lump sum change for 2022-2023?