Are Your Pension Benefits Guaranteed?

(Washington Post) If you have a pension, there’s a certain relief to retirement because you’ll be getting a set amount of money every month for the rest of your life. But what if that is not the case anymore?

It comes at no surprise, a few people wondered whether they were being paranoid about their pension.

Q: “I’m lucky enough to work for a company that has a pension plan,” wrote a reader from Connecticut. “When I first started with the company, I contributed to both the pension and the 401(k), and the company did a 401(k) match. About five years into my tenure, they stopped the 401(k) match, and a couple of years after that, new employees were no longer enrolled in the pension plan. My manager is convinced that the next step will be eliminating the pension for the grandfathered employees. Can my company do that? The pension is fully funded. Given that, can they make changes now?”

A: Yes, an employer can end a pension plan through a process called “plan termination,” according to Pension Benefit Guaranty Corp. (PBGC), which insures private-sector pension plans. The PBGC operates two separate insurance programs — one covering pension plans sponsored by a single employer and another covering “multiemployer” pension plans.

There are two ways an employer can terminate a pension plan, according to the PBGC.

— Standard termination: The company can only terminate the pension after proving to the PBGC that “the plan has enough money to pay all benefits owed to participants. The plan must either purchase an annuity from an insurance company (which will provide you with lifetime benefits when you retire) or, if your plan allows, issue one lump-sum payment that covers your entire benefit.”

— Distress termination: If a plan is not fully funded, an employer can apply to terminate the pension plan if the company is under financial distress. “However, the employer must prove to a bankruptcy court or to PBGC that the employer cannot remain in business unless the plan is terminated,” according to PBGC. “If the application is granted, PBGC will take over the plan as trustee and pay plan benefits, up to the legal limits, using plan assets and PBGC guarantee funds.”

Here’s some additional information from Karen Friedman, executive vice president of the nonprofit Pension Rights Center.

Friedman: “Given the employer’s history of freezing the pension plan for new employees and stopping the match for the 401(k), the boss could very well be thinking about terminating the plan. Since the private pension system is ‘voluntary’ there is no requirement that an employer establish or preserve the plan. If the reader has not already received a statement showing how much he or she has earned under the plan, he or she should write to the administrator of the plan to request an ‘individual benefit statement.’ On another note, it could be beneficial for fellow employees to relay their concerns to the company. Some employers feel that they can cut their costs by stopping employer matches and freezing or terminating pension plans because they think that few if any employees protest what is effectively a pay cut. It is important that employees let their bosses know that they value their retirement plans as an important part of their compensation.”

Increasingly, folks heading into retirement are feeling skittish about their pension security.

Q: “I live in an area where a lot of the union pensions are not adequately funded (e.g. one worker today supports seven to eight retirees),” a reader from Pittsburgh wrote. “Also, many local and state pensions are woefully underfunded. That bill will come due and then what happens?”

A: Let’s address union pensions first. As Friedman of the Pension Rights Center points out, in many industries — coal mining, construction trades, trucking — there are pension plans that are jointly trusteed by a union and a number of employers paying into the fund. These are known as multiemployer plans.

The PBGC says there are 1,400 multiemployer plans covering 10 million workers and retirees. In a recent report, the PBGC said about 125 multiemployer plans covering 1.4 million people are expected to run out of money over the next 20 years.

In an effort to save these plans, Congress passed the Multiemployer Pension Reform Act that allows financially troubled plans to apply to cut workers and retirees’ benefits. Despite the intention of the law, Friedman said it was a “misguided” solution.

Here’s a fact sheet from the Pension Rights Center about the law.

“Already 14 multiemployer plans have cut tens of thousands of retirees’ benefits by more than 60 percent with the result that the retirees are having to forego medical treatment, sell their homes and even consider filing for bankruptcy,” Friedman said. “At the Pension Rights Center, we think this is terribly unfair. The retirees whose benefits have been cut had given up wages in exchange for their promised benefits. They did nothing to contribute to the underfunding of their pension plans.”

It’s not just private pension plans that are in trouble. Look at what happened in Detroit. Unfunded pension and retiree health-care liabilities accounted for about 40 percent of the financial obligations for the city, which filed for federal bankruptcy protection in 2013. As part of its filing, Detroit had to make some major changes, which included cutting pension and health-care benefits for retirees and reducing pension benefits for current workers.

A 2018 report by the Pew Charitable Trusts examined the aftermath of Detroit’s pension crisis. “Unfunded pension obligations and retiree health care costs amounted to roughly $7.4 billion of Detroit’s $18 billion in bankruptcy debt,” Pew pointed out in its report, “The Challenge of Meeting Detroit’s Pension Promises.”

“Most state pension plans are well-funded, and for those that aren’t, studies show it’s because the state legislators didn’t fund the plans, such as in Illinois and New Jersey,” Friedman said. “According to Dan Doonan, the executive director of the National Institute on Retirement Security, states that have shortchanged their pension contributions in the past will have to develop, and stick to, sound funding practices in the future to rectify past mistakes, as states cannot go bankrupt. Despite the predictions that many jurisdictions would go bankrupt after the Great Recession, public plans are not defaulting on pension benefits. The few cities that did seek bankruptcy were experiencing a wide range of very difficult economic challenges, including Detroit.”

Sarah Anzia, an associate professor of public policy and political science at the University of California at Berkeley, wrote recently in an analysis for The Washington Post that “over the past few decades, policymakers from California to Wyoming have made public pension benefits ever more generous — while setting aside too little money to pay for them.”

Anzia points to another Pew report released this year that found that governments have underfunded their pensions by at least $1.28 trillion.

“Current state and local government employees and retirees will almost certainly get their pensions,” Anzia said. “Out of the public eye, public-sector pension expenditures are quietly and persistently eating into local government budgets. As a result, local government workforces in many places are shrinking. This doesn’t just mean fewer government jobs to go around. It means that all those who rely on local government services are in danger of losing those supports. Many Americans take for granted that their local governments will provide public services like police protection, fire protection, street sweeping and refuse collection. But it may well become harder for local governments to carry out those basic functions — because of rising pension costs.”

Private pension plans are required to file a financial report called a Form 5500 every year with the federal government. It’s important that you read the annual pension funding notice you receive as a plan participant. 

Federal law requires that the company disclose any events that have a material effect on a plan’s assets or liabilities. Being aware of the financial health of your plan is vital as you run the numbers for your retirement.

For more information about your pension rights, visit the Pension Benefit Guaranty Corp. website. If you have a question, contact the Pension Rights Center. You should also check out the website for the latest news about pension-related legislation.

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