When the markets are roaring and our investments are souring it’s hard to imagine that your defined pension plan benefit can be on shaky ground. If you are expecting to fund your retirement with a company pension then at some point you should be ready to answer the question. Can You Depend on Your Pension?
It shouldn’t be too hard to remember what happened to your 401K and IRA balances during the 2007 – 2009 market plunge. The slow slog through the lingering recession. The same thing happened to pension plans across the country. These pensions are heavily managed and should have recovered with the economy. Just as your own savings have. But it depends on whether the pension was managed and funded the right way.
At Least There is the PBGC
Another issue was that many pension plans were in trouble long before the recession. The recession was the last straw. The Pension Benefit Guaranty Corporation (PBGC) ended up having to cover these defaulted pension plans. If you are not familiar with the PBGC. It is a non-profit corporation that guarantees the payment of certain pension benefits under defined-benefit plans. It steps in when a pension plan has been terminated for having insufficient money to pay promised pension benefits.
The PBGC is under the jurisdiction of the Department of Labor. Once your pension becomes covered by the PBGC your benefits may (probably will) be reduced. The reduction is based on your age at default, the under-funding amount, and other factors.
Can You Depend on Your Pension? Find out How Well Your Pension is doing.
Companies now have to follow the laws that came with the Pension Protection Act of 2006. It was enacted to shore up company pensions by increasing their PBGC premiums. It erased the loopholes that allowed companies to skip pension payments when they were underfunded. It demands that companies report to participants better and more accurate assessments of their pension obligations and funding status.
Pension Health – Form 5500
The report that you want to review is Form 5500. Within it you can tell your plan’s funding status. You can see if it is funded 100% or higher. Or if it is underfunded and by how much. This form will provide you with the plan’s total assets and liabilities, plan asset allocation, and PBGC covered benefits.
Form 5500 is a monster tax-like form. You want to look at Schedule SB. Here is what you want to look for:
- Line 2(b) Current Actuarial value of the Assets.
- Line 3(d) Total amount of funding target.
Compare these two lines. If Assets are more than the funding target then congratulations, you can depend on your pension at least for now because it is fully funded. If assets are less than liabilities then your plan is underfunded.
Look at Part 3 – Funding Percentages to see what the calculated funding percentage is being reported as. This Schedule SB also shows whether your company has made any contributions or payments required to keep the plan funded.
Being only a little underfunded is still generally OK but if it is 20% or more underfunded then you may need to be concerned so start asking your company questions about how the under-funding shortfall will be handled. Your company can’t just sugar coat the situation or dance around the issue.
Underfunded Pension-What to Expect.
Companies can’t just sit silent and do nothing about their pension funding obligations. However they have options on how they will address the shortfall. You will want to know their plans before you make any pension decisions for yourself. Your goal now is to understand all of your options.
If your pension is substantially underfunded and your company is in financial trouble. They will more than likely have to reduce pension benefits. The most common strategy companies use to cut their pension pressure is modifying the plan. By changing the benefit formula used, going to a cash plan, or freezing the pension plan.
None of these moves will be to your benefit other than if it works to give you some peace of mind. Even though you will probably get less than you expected. You may find some comfort knowing that it might now be depended upon for the long haul.
Pension Buyout / De-Risking
In some cases the company may offer buyout options to some employees and retirees. If they do, you should think very carefully before accepting such an offer. In some cases it may be best to jump ship and get what you can. In other cases they may be low-balling you and it would better to hang-tough. That is if you have any option to do so. Keep emotions out of the decision and seek professional help.
Pension De-Risking by handing off your benefit to an insurance company for an annuity is the new company method. It removes the retiree benefits from the company books and obligations. It has its own set of negatives for a retiree.
Company Bankruptcy/Pension Default
When all else fails and your company goes bankrupt with an underfunded pension. It will be the PBGC that handles your retirement benefit. There are limitations and maximums that the PBGC will payout. The limits are based on your age at the time of default and other factors.
Regardless of whether you find your pension is fully funded now or underfunded you should continue to stay on top of its funding status as time goes because things can change.
Obviously if you have come to depend on your pension but your answer to the question, Can You Depend on Your Pension is a big giant NO, then you will have to go into a self-funded mode of retirement thinking and the sooner the better.
Start saving more than you did before and if you can also cut back on your lifestyle spending. Create a plan and stick to it and most of all make informed decisions and if you need help GET IT.
Even though you could end up with a reduced benefit if the worst occurs, it sure is better than nothing.