How can you know if your pension is safe?
The Pension Benefit Guaranty Corp., the government agency that currently insures $800 billion of promised pension benefits, annually sends ripples of worry through the ranks of employees when it lists large companies with underfunded pension plans.
This year's list put the underfunding by 50 large companies at $14.2 billion. All together, insured private pension plans are underfunded by some $20 billion to $30 billion, with much of that concentrated in the steel, auto and airline industries, the agency said.
But while the PBGC list grabs headlines, underfunding is by far not the only reason -- and often isn't even the main reason -- for plan members to sit up and take notice. Instead, said pension experts, members need to pay attention to their pension plans on a regular basis. After all, for many Americans, their pension fund is their second biggest asset after their house, and often it's the biggest.
"The fact that a plan is underfunded doesn't mean much unless a company decides to stop the plan and it's in serious financial trouble," said Karen W. Ferguson, director of the non-profit Pension Rights Center.
"Being on the list doesn't mean there's any problem whatsoever," agreed Donald S. Grubbs Jr., a Silver Spring pension actuary and consultant. And even if there is a problem, ** he added, most defined benefit plans -- those that promise to pay a set amount each month at retirement -- are guaranteed by the PBGC, although there are dollar limits.
L Concerns over pensions basically fall into these categories:
* Are the fund managers operating within federal rules or are they engaged in unsound, shady or questionable transactions?
* Are the fund's investments doing well?
* Is the company in danger of going bust, or is it likely it will be sold or take some other action that will affect its pension plan?
Answering those questions is a matter of examining financial statements and reports and keeping up with company and industry news. You also have to know some basic facts, such as what kind of pension you have, and what the basic rules governing those are.
Pensions fall into two categories. One type is called a defined benefit plan, the other is called a defined contribution plan. Defined benefit plans are what most people think of as a pension: you work a number of years at a company, you retire and your pension check, usually based on the number of years you worked and your salary, arrives every month in your mailbox. It's called a defined benefit because it promises to pay you a fixed amount at retirement. A company has to make sure there is enough money in its pension fund to pay what has been promised. If it's short -- or underfunded -- it has to make up the difference.
Most of the growth in pension plans, however, has been in defined contribution plans, such as a 401(k). In these, the employer promises only to set aside a certain amount for each employee in a tax-deferred account. If the investments in an employee's account lose money, that's the employee's problem, not the company's.
If you have a defined benefit plan -- these are most widely offered by established manufacturing companies -- check to see if it's insured by the PBGC.
Most private defined benefit plans are among the 95,000 insured by the PBGC. All together, defined benefit plans have $1 trillion in assets and cover 40 million workers and retirees.
There are, however, exceptions. If you work in a professional office -- doctors, dentists, lawyers, architects, etc. -- with 25 or fewer employees, your pension is not insured. If you work for a religious group or a religious-affiliated institution like a school or hospital, your pension may not be insured; these groups are the only ones that can choose whether or not to be covered by the PBGC. Government plans are not covered.
The PBGC insurance is triggered when two events occur: a plan is terminated and a company is insolvent.
Even if your pension is insured, however, that doesn't mean you have nothing to lose. The PBGC guarantees only basic benefits up to certain dollar amounts; getting any amount above that depends on what the agency can recover in bankruptcy proceedings.
The PBGC currently guarantees pension benefits up to $2,250 a month, or $27,000 a year, for someone aged 65 or older -- quite a drop from the maximum $108,963 allowed in 1991. Benefits above $27,000 a year are not insured.
"Those whose benefits are best stand to lose the most," said Ferguson.
And there are other glitches. If your plan is less than five years old, the amount that is insured is phased in at the rate of 20 percent a year. For instance, say you have been working at a company for 15 years, and at that point it starts a pension plan. Under its formula, your benefit would be $400 a month. Two years later your company goes broke. The PBGC will guarantee only $160 -- 40 percent -- of your $400 benefit.
The same holds true if a company upgrades its pension plan: the improvement is phased in over five years at 20 percent a year.
In addition, if you took an early retirement package that included a special payment to bridge the gap until you could begin drawing Social Security, that special payment normally is not insured. Disability pension benefits are insured only if they are being paid when the plan is stopped.
Employees not yet vested in a plan could lose their accrued benefits; whether they would get any would depend on how much the PBGC recovered in bankruptcy proceedings.
In its annual report issued Feb. 27, the Pension Benefit Guaranty Corp. said its losses from underfunded defined benefit plans amounted to $928 million last year. The agency paid $372 million in benefits to more than 112,500 retirees and faces obligations for another 95,500 people when they become eligible for retirement. The agency also estimated that it probably will have to take over plans with an additional 138,000 participants.
Here are some publications that can help you understand pension rules and laws:
* "What You Should Know about the Pension Laws" is a fre 60-page government booklet that outlines the rights, safeguards and guarantees of the private pension laws. Write to the U.S. Dept. of Labor, Pension and Welfare Benefit Administration, Division of Public Information, 200 Constitution Ave. NW, Room N-5511, Washington, D.C. 20210.
* "Your Pension: Things You Should Know About Your Pension Plan" is a 24-page booklet that also describes the major provisions of the private pension laws. You can get a free copy by writing to the Pension Benefit Guaranty Corp., Coverage & Inquiries Branch, Insurance Operations Dept., 2020 K St. NW, Washington, D.C. 20006.
* "Protecting Your Pension Money: A Pension Investment Handbook" is a 42-page booklet by the Pension Rights Center that gives detailed, illustrated directions on how to decipher the Form 5500 and its attached documents. Send $6 (make checks payable to Pension Rights Center) to Pension Publications, 918 16th St NW, Suite 704, Washington, D.C. 20006.
"A Guide to Understanding Your Pension Plan" is a free 48-page booklet written by the Pension Rights Center for the American Association of Retired Persons that helps you understand private defined benefit plans. Send your request for "A Guide to Understanding Your Pension Plan," AARP Stock No. D-13533 to AARP Fulfillment, 1909 K St. NW, Washington, D.C. 20049.