The Dangers of Default for Defined Benefit Pension Plans

 You don’t have to be an actuarial genius to understand that defined benefit pension plans are in trouble. The global market collapse hit plans twofold – less investment dollars being invested into the plan because the companies simply did not have the money plus assets invested fell to cruel levels. As far back as 2005 alarm bells were being sounded as airline pensions were going kaput and the Pension Benefit Guaranty Corporation reported to a Senate Committee that promised pension benefits may not be available for a good percentage of  employees in certain industries. And, unless things changed, PBGC would not be able to guarantee even minimal retirement payments since its charter was not backed by the good faith and credit of the United States government. The company is supported by fees from member corporations.

In 2004 there were 44 million workers who depended on PBGC to ensure their getting benefits. Even though 401k plans have taken over as a primary retirement funding plan for many workers about 40% of those retiring baby boomers are relying on income from a defined benefit plan. The defined benefit plan is funded by the employer for the benefit of the employee. Usually it provides a guaranteed retirement income using a formula based on the employees tenure and earned income.

In 2004 the scale of corporations that were underfunding their pension plans was alarming and pervasive the agency estimated that total underfunding (2004!) was around $600 billion.

When PBGC reported to the Senate Committee 70% of their insured losses were from two industries – steel and airline. Today we can assume that those losses have accelerated across a wide spectrum of businesses.

The problem gets worse when you realize that PBGC does not cover government employees. Those employees have to look to the state or city for their guarantees, or rather the lack of them. All of us in Michigan know how mismanaged the City of Detroit’s Employees Pension has been with the F.B.I. investing alleged corruption and possible theft.

The fallout to current and future retirees from mismanaged or underfunded pension plans will at best result in far less guaranteed income than had been projected and promised. The worst that can be expected is no benefits at all. Add the fact that municipalities and states are having budget troubles and shortfalls and its no stretch to understand that this is a problem with possible distressing consequences.

Unfortunately there is little an employee can do except be vigilant regarding their pension benefits.  Don’t assume that because you’ve retired and the income stream has begun that everything is okay-dokey. The danger of default for iffy firms is a constant concern.

How do employees check on the health of their defined benefit retirement plan?

• Make sure that you are getting an annual report.
• Call and ask about the financial health of the plan if you do not understand the report.
• Talk to your Human Resources department. Sometimes they do not know and you should take your suggestion to your supervisor to find someone that does know.
• If the firm has had a bankruptcy that often impacts the pension but not always as in the GM bankruptcy.
• Finally go to www.pbgc.gov and check their records and on-line files for information about your private defined benefit pension.

You should always have a systematic retirement or savings plan set outside your workplace. This can be a valuable asset for children’s education, an emergency fund and last but not least a supplemental retirement plan.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.