Each September, Southern California Edison employees who participate in the pension plan tend to pay close attention to the rates that will affect pension values for the coming year. With that annual update approaching, this is a useful time to step back and answer a broader question: How does the SCE pension work, and how should it fit into an overall retirement strategy?

 

It is important to begin with one clarification. Not every SCE employee participates in the pension plan. Edison International states that employees hired after December 31, 2017 are not eligible to participate in the SCE Retirement Plan. Instead, those employees receive additional employer contributions to the Edison 401(k) Savings Plan.

 

For employees who are eligible for the pension, however, it can represent a significant retirement asset. Understanding the benefit, the available payment options, and the role interest rates may play is important, but the pension should generally be evaluated alongside your 401(k), Social Security, taxes, healthcare needs, investment assets, and long-term retirement income goals.

 

The pension decision is not simply about choosing the largest number on a benefit statement. It is about determining how the benefit fits into the retirement you are trying to create.

 

Who Is Eligible for the SCE Pension?

 

The SCE Retirement Plan is a non-contributory defined-benefit pension plan. In other words, eligible employees earn benefits under the plan without making employee contributions to the pension itself.

 

The structure of the plan has changed over time.

 

Historically, the SCE Retirement Plan operated as a traditional final-average-pay pension. Beginning in 1999, most participants transitioned to a cash-balance structure. Certain longer-tenured employees who met specific age and service requirements were grandfathered under prior pension formulas.

 

Employees hired after December 31, 2017 are generally not eligible for the pension plan. Edison instead provides additional employer contributions to the 401(k) plan for those employees.

 

This distinction is important because two SCE employees of similar ages may have very different retirement benefits depending on when they were hired and which plan provisions apply to them.

 

Key Question

Do you know which SCE retirement benefit structure applies to you and how much of your future retirement income is expected to come from the pension?

 

How Does the SCE Cash Balance Pension Work?

 

For eligible employees participating under the cash-balance provisions, the pension is expressed through a cash-balance account.

 

The account generally grows through two primary components: pay credits and interest credits. Eligible employees receive credits based on plan provisions, and the account also receives interest credits over time. Eligible participants receive monthly pay credits based on their age and service points, along with an additional monthly medical credit for participants eligible to receive a pay credit.

 

The result is an account balance that represents the value of the participant’s accrued pension benefit.

 

Although the account may look somewhat like a 401(k) balance on a statement, the two plans are fundamentally different. The pension remains a defined-benefit plan funded by the employer, while the 401(k) is a defined-contribution account whose value depends on contributions, investment choices, and market performance.

 

Understanding that distinction can help employees avoid treating the pension as simply another investment account.

 

Why Do SCE Pension Rates Get So Much Attention?

 

Interest rates matter because the SCE cash-balance pension uses an interest crediting rate to determine how the cash-balance account grows.

 

Edison’s cash-balance accounts earn monthly interest based on the third segment rate of a corporate bond yield curve specified by the IRS for August preceding the plan year.

 

That is one reason August rates and the subsequent September pension-rate announcement receive so much attention among employees approaching retirement.

 

The relationship between interest rates and pension values can be confusing because different pension calculations may respond differently to rate changes. For employees considering retirement, the important point is that changing rates can affect projected pension values and may influence the timing discussion.

 

However, retirement timing should not be based on the pension rate alone.

 

A potentially favorable pension calculation may be important, but retiring earlier or later can also affect:

 

• Salary and continued savings
• Additional pension accruals
• 401(k) contributions
• Healthcare coverage
• Social Security timing
• Taxes
• Investment withdrawals
• Lifestyle and personal readiness

 

The pension rate should therefore be treated as one planning variable rather than the sole reason to retire.

 

Key Question

If pension rates changed materially, would that actually change your retirement decision once your income, taxes, healthcare, and other financial resources were considered?

 

How Do Pension Rates Affect the Monthly Annuity Payment?

 

If an eligible participant elects the monthly annuity rather than the lump sum, the pension interest rates in effect when the pension commences are also used to convert the pension value into monthly income. This is a different calculation from the interest crediting that occurs while the cash-balance benefit is growing.

 

While the third segment rate is used for interest crediting on the cash-balance account, all three segment rates are used when converting the pension value into an annuity, subject to the applicable plan terms. Broadly, the rates are applied to different portions of the expected payment period:

 

• The first segment rate applies to years 1 through 5.
• The second segment rate applies to years 6 through 20.
• The third segment rate applies to years 21 and beyond.

 

One way to think about these rates is as the assumed interest return used in translating the pension value into a stream of monthly payments. All else being equal, higher applicable segment rates generally result in a higher monthly annuity payment, while lower rates generally result in a lower payment.

 

Because pension rates can affect the cash-balance benefit and the annuity conversion in different ways, employees comparing retirement dates may want to look beyond the third segment rate alone and consider how the full set of rates affects the payment option they are evaluating.

 

Key Question

How would the pension rates in effect on your anticipated retirement date affect both the value of your pension and the monthly annuity option available to you?

 

What Pension Payment Options May Be Available?

 

Eligible SCE pension participants may have several ways to receive their benefit.

 

Eligible participants may be able to elect a lump sum, a life annuity, a joint-and-survivor annuity if married, or a contingent annuity.

 

These choices create very different retirement outcomes.

 

Lump Sum

A lump-sum election generally provides the pension value in a single distribution, subject to plan rules and applicable tax requirements.

 

Depending on how the distribution is handled, an eligible lump sum may potentially be rolled into another qualified retirement account, allowing the assets to remain tax deferred.

 

The lump-sum option may provide greater control and flexibility, but it also transfers responsibility for investment management, withdrawals, longevity, and market risk to the retiree.

 

Monthly Pension

A monthly pension provides income according to the payment option selected.

 

For some retirees, predictable monthly income can help cover recurring expenses and reduce dependence on investment withdrawals. The tradeoff is that the retiree may have less access to the underlying pension value and less flexibility than with a lump sum.

 

Survivor Options

Married employees may also need to consider how pension income would continue if one spouse dies.

 

Joint-and-survivor and contingent annuity options can provide continuing income to another individual, but the initial payment may differ depending on the level of survivor protection selected.

 

This is why a pension election is often a household decision rather than simply an individual retirement decision.

 

Key Question

Is your priority maximizing current income, maintaining flexibility, protecting a spouse, preserving assets for heirs, or some combination of those objectives?

 

Lump Sum or Monthly Income: There Is No Universal Answer

 

One of the most common questions SCE employees ask is whether they should take the lump sum or elect monthly pension income.

 

There is no single answer that is appropriate for every employee.

 

The analysis may involve several factors, including:

 

• Age at retirement
• Health and longevity expectations
• Spouse or partner needs
• Other guaranteed or predictable income
• Investment experience
• Risk tolerance
• Liquidity needs
• Estate planning goals
• Tax considerations
• The relative value of the available pension options

 

Someone with significant investment assets and substantial predictable income from other sources may evaluate the choice differently from someone whose pension will provide most of the household's essential retirement income.

 

Rather than asking which option is universally better, it may be more useful to ask which option best supports the overall retirement plan.

 

Your Pension Is Only One Part of Retirement Income

 

For many SCE retirees, retirement income may eventually come from several sources:

 

• SCE pension benefits
• Social Security
• 401(k) savings
• Traditional or Roth IRAs
• Taxable investment accounts
• Cash reserves
• Other income sources

 

Each source has different characteristics.

 

Some may provide predictable income. Some may fluctuate with financial markets. Some may be taxable when withdrawn, while others may receive different tax treatment.

 

A well-coordinated retirement strategy considers how those resources work together rather than making each decision independently.

 

For example, someone receiving substantial pension income may have less need for immediate withdrawals from a 401(k). Another retiree may elect a lump sum and rely more heavily on investments to generate retirement income.

 

Neither approach is inherently right or wrong. The appropriate structure depends on the household's broader circumstances.

 

Do Not Forget About Inflation

 

One important consideration when evaluating retirement income is purchasing power.

 

Retirement may last 20, 30, or even more years. During that time, expenses such as food, healthcare, insurance, travel, utilities, and property taxes may rise.

 

If a significant portion of retirement income is fixed, retirees should consider how other assets may help address increasing expenses over time.

 

This is another reason pension planning should not occur in isolation. A retirement income strategy may need to balance predictable income today with sufficient flexibility and growth potential for the future.

 

Taxes Can Influence the Pension Decision

 

Pension income is generally subject to federal income tax, and state taxation depends on where the retiree lives and applicable law.

 

 

A lump-sum distribution may also create significant tax consequences if it is received directly rather than transferred through an eligible rollover.

 

For employees approaching retirement, pension decisions can also interact with:

 

• 401(k) withdrawals
• Roth conversions
• Social Security taxation
• Required Minimum Distributions
• Medicare income-related premium adjustments
• State residency and relocation decisions

 

The objective should generally not be to minimize taxes in a single year without considering the long-term consequences.

 

Instead, retirees may benefit from evaluating how the pension fits into a multi-year retirement income and tax strategy.

 

What About Employees Who Do Not Have the Pension?

 

Employees hired after the pension eligibility cutoff may have a different retirement planning challenge, but that does not necessarily mean they are at a disadvantage.

 

Employees hired after December 31, 2017 receive additional non-contributory employer contributions to the Edison 401(k) Savings Plan in place of pension participation.

 

For these employees, retirement planning may rely more heavily on:

 

• 401(k) accumulation
• Investment allocation
• Savings rates
• Social Security
• Personal investment accounts
• Creating an eventual retirement income strategy

 

Without a traditional pension benefit, understanding how much retirement income the portfolio may need to generate becomes particularly important.

 

The planning question remains essentially the same: How will all of your available financial resources work together to support the retirement lifestyle you want?

 

Common Pension Planning Mistakes

 

Focusing Only on the Annual Pension Rate

Rates matter, but they are only one factor in determining whether a particular retirement date makes sense.

 

Comparing Only the Lump Sum and Monthly Payment

The larger planning question includes taxes, investment risk, longevity, survivor needs, liquidity, and other retirement assets.

 

Making the Decision Without Considering a Spouse

A pension election may affect household income for decades and should generally account for the financial needs of both spouses.

 

Assuming the Pension Alone Determines Retirement Readiness

A pension can be an important asset, but healthcare, Social Security, investments, taxes, and spending should also be included in the analysis.

 

Waiting Until the Retirement Date to Start Planning

Pension decisions often become easier to evaluate when retirement scenarios are modeled well in advance.

 

Key Takeaways

The SCE pension can be a valuable retirement benefit for eligible employees, but it is not available to everyone.

 

Employees hired after December 31, 2017 are generally not eligible to participate in the pension and instead receive additional employer contributions to the Edison 401(k) Savings Plan.

 

For eligible pension participants, the plan may include cash-balance benefits and, depending on the employee's history, potentially grandfathered benefits under earlier formulas.

 

Pension rates can affect calculations and deserve attention, particularly around the annual September update, but they should not be the only factor determining when to retire.

 

For employees considering the monthly annuity, all three segment rates can play a role in converting the pension value into monthly income, while the third segment rate is used for interest crediting on the cash-balance account.

The most important decision is how the pension fits into your broader retirement strategy, including your 401(k), Social Security, healthcare, taxes, investments, spouse protection, and long-term income needs.

 

Frequently Asked Questions

 

Does every SCE employee receive a pension?

No. Employees hired by participating companiesafter December 31, 2017 are generally not eligible for the pension plan. Additional employer contributions are instead made to the Edison 401(k) Savings Plan for those employees.

 

What type of pension does SCE offer?

The SCE Retirement Plan is a defined-benefit pension plan. Most eligible participants transitioned to cash-balance features beginning in 1999, while certain employees may have grandfathered benefits under previous plan formulas.

 

Can eligible SCE retirees take a lump sum?

Eligible participants may elect among several payment forms, including a lump sum, life annuity, joint-and-survivor annuity, or contingent annuity, subject to plan provisions.

 

Why are September pension rates important?

The cash-balance interest crediting rate is tied to an IRS corporate bond yield measure for August preceding the plan year, making the annual rate update important for employees monitoring their pension benefits.

 

How do pension rates affect the monthly annuity payment?

For eligible participants who elect a monthly annuity, the pension rates in effect when benefits commence are used in the annuity conversion. The first, second, and third segment rates generally apply to different portions of the expected payment period, while the third segment rate is used for interest crediting on the cash-balance account. The specific calculation is governed by the applicable plan terms.

 

Should I retire because pension rates are changing?

A change in pension rates may be an important consideration, but retirement timing should generally be evaluated alongside salary, continued benefits, 401(k) savings, healthcare, taxes, Social Security, and personal retirement goals.

 

Is the lump sum better than monthly pension income?

There is no universal answer. The appropriate election depends on individual financial circumstances, income needs, longevity, spouse protection, liquidity, risk tolerance, taxes, and estate planning objectives.

 

Final Thoughts

 

The annual SCE pension-rate announcement naturally attracts attention from employees approaching retirement. For those who participate in the pension, changes in rates can influence an important retirement asset and deserve careful consideration.

 

But a pension rate should not become the retirement plan.

 

The larger objective is to determine how your pension, 401(k), Social Security, investments, healthcare, and other resources can work together to support the life you want after leaving SCE.

 

At Guardian Financial Partners, we believe retirement planning is most useful when individual decisions are evaluated as part of a coordinated strategy. Understanding your pension is an important step, but understanding how that pension fits within your complete financial picture can help you make more informed decisions designed to preserve your assets and protect your lifestyle.

 

 

About the Author

Casey S. Bartels, CFP® is a Founding Partner of Guardian Financial Partners. Since 2007, Casey and his partners have worked with Southern California Edison employees and executives, helping them navigate retirement planning, pension decisions, and other important financial considerations.

 

Educating Edison is our educational series designed to help Southern California Edison employees better navigate their financial lives.

 

 

Guardian Financial Partners is not affiliated with, endorsed by, or sponsored by Southern California Edison. The content presented in the Educating Edison series is for educational purposes only and is not intended as individualized investment, tax, or legal advice. Plan provisions, eligibility requirements, pension calculations, and available distribution options may change and can vary by participant. Employees should review current Southern California Edison plan documents and consult appropriate financial, tax, and legal professionals regarding their individual circumstances.