Funding percentage of a pension fund

[utrecht]

If a pension fund is 80% funded, does that mean that if the pension was frozen and nobody made any further contributions, the pension fund has enough money to pay out 80% of all promised benefits? In other words, could everyone retire at that moment and expect to get paid a pension check of 80% of whatever pension benefits they had accrued at that time?

 

[brewer12345]

Its not that simple. 80% funding means that the assets in the fund are equal to 80% of the actuarially estimated present value of all the future payouts the fund is on the hook for. There are a huge number of assumptions that go into getting that actuarial estimate and the assumptions and other inputs change every year, so this is more of "cut with an axe" type measure than a "cut with a rzaor blade" precise number.

 

[MasterBlaster]

If a pension fund is 80% funded, does that mean that if the pension was frozen and nobody made any further contributions, the pension fund has enough money to pay out 80% of all promised benefits? In other words, could everyone retire at that moment and expect to get paid a pension check of 80% of whatever pension benefits they had accrued at that time?

A pension at 80% funding means that assuming the expected growth rate of the assets that there is 80% of the money available to meet the pension obligations.

Assets do indeed fluctuate in value and the markets have been weak over the last 5 (or so) years. What the funding status means is that the company will probably have to increase it's contributions.

The 80% threshold is vital as lump sum (and many other non monthly annuity) payouts are not allowed (by law) below that amount.

In reality the pension fund is probably much less well funded that it appears. They are probably holding CDO's (collateralized debt obligations - ie mortgage debt) and other structured products that have not been listed at their true value (ie. Marked-to-market)

Also many pensions growth estimates are unrealistic. They will almost certainly not meet their growth targets.

In short pensions and their funding are in trouble for many companies.

 

[pb4uski]

If a pension fund is 80% funded, does that mean that if the pension was frozen and nobody made any further contributions, the pension fund has enough money to pay out 80% of all promised benefits? In other words, could everyone retire at that moment and expect to get paid a pension check of 80% of whatever pension benefits they had accrued at that time?

I don't think so. I'm going from memory here as it has been more than a decade since I dealt with the details of corporate pension reporting.

IIRC the numerator is the fair value of the pension fund's assets (but as MB observes there may be some issues with that value) and the denominator is the pension plan's projected benefit obligation (PBO).

The PBO is the present value of projected benefit payments given certain assumptions discounted at high quality corporate bond rates.

Since the PBO would include projections of future pay increases, etc. the ratio would be higher if the plan was frozen. In that case it would probably be the value of the pension assets divided by the accumulated benefit obligation (or ABO) which reflects the portion of the PBO that the employees have earned as of the reporting date.

 

[ERD50]

If this is a private pension, they will be covered (and pay into) the PBGC, and they cover all but high earners at 100%. 'High earner' is a pension of > about $55,000/year.

General FAQs About PBGC

-ERD50

 

[kyounge1956]

A(snip)The 80% threshold is vital as lump sum (and many other non monthly annuity) payouts are not allowed (by law) below that amount.(snip)

Is this a state law, federal or what? Does it apply to government employees' pension funds as well as those of private companies? I am a local government employee planning to retire within the next year and was thinking of taking an option which includes a lump sum payment. I just checked the retirement system website and the funding level is at 64.5% as of the most recent Pension Board minutes.

 

[ziggy29]

Is this a state law, federal or what? Does it apply to government employees' pension funds as well as those of private companies? I am a local government employee planning to retire within the next year and was thinking of taking an option which includes a lump sum payment. I just checked the retirement system website and the funding level is at 64.5% as of the most recent Pension Board minutes.

I believe the PBGC is specifically for the private sector.

If I were a public sector employee in a pension plan that was only 64.5% funded, I would strongly lean toward the lump sum provided it were actuarially a fair deal.

 

[MichaelB]

I believe the PBGC is specifically for the private sector.

If I were a public sector employee in a pension plan that was only 64.5% funded, I would strongly lean toward the lump sum provided it were actuarially a fair deal.

+1

 

[utrecht]

What happens when a pension fund is frozen? Who gets paid what? Obviously nobody is going to accrue future benefits, but what happens to the pension checks of people who are already retired? If the fund is 80% funded, they cant continue to get 100% of their pension checks can they? What happens to the benefits that have already been earned of someone who is already vested? What happens to the money in the pension fund itself? Is everything in the fund liquidated and the money used to buy annuities for the members? Or does the money stay invested and pension checks continue to sent out?

The reason I'm asking all of this is because there is a group in Texas trying to get a law passed banning all DB pensions. My pension happens to be one of the best run mid sized pensions in the country. Recently a survey was done and it had the highest returns of the 100 mid sized pension funds surveyed and had the 2nd lowest risk ratio. I think the survey covered the last 10-15 years. But if the law gets put on the ballot and passes, our DB pension plan will be eliminated just like all of the other ones who are mismanaged and include spiking and all of those other things that make people think every pension fund is evil.

 

[MasterBlaster]

What happens when a pension fund is frozen? Who gets paid what? Obviously nobody is going to accrue future benefits, but what happens to the pension checks of people who are already retired? If the fund is 80% funded, they cant continue to get 100% of their pension checks can they? What happens to the benefits that have already been earned of someone who is already vested? What happens to the money in the pension fund itself? Is everything in the fund liquidated and the money used to buy annuities for the members? Or does the money stay invested and pension checks continue to sent out?

The reason I'm asking all of this is because there is a group in Texas trying to get a law passed banning all DB pensions. My pension happens to be one of the best run mid sized pensions in the country. Recently a survey was done and it had the highest returns of the 100 mid sized pension funds surveyed and had the 2nd lowest risk ratio. I think the survey covered the last 10-15 years. But if the law gets put on the ballot and passes, our DB pension plan will be eliminated just like all of the other ones who are mismanaged and include spiking and all of those other things that make people think every pension fund is evil.

For retirees the pension monthly paymentsare funded from the investments in the pension plan. Should the plans assets fall short then the company must pay into the fund to make up the shortfall. If the company goes bankrupt then the Pension Benefit Guarantee Corporation (PBGC - a government agency) will step in to pay pensions. But they reduce payments per their schedule. It depends on how old you were when the plan went belly-up and how much your monthly payment was.

Welcome to PBGC

Rules regarding future retirees are all discussed at the PBGC website.

For example for plans terminating in 2012:

a 65 year old worker can get up to $4188/month from the PBGC
a 55 year old worker can get up to $1884/month from the PBGC
a 65 year old worker can get up to $1047/month from the PBGC

 

[kyounge1956]

I believe the PBGC is specifically for the private sector.

If I were a public sector employee in a pension plan that was only 64.5% funded, I would strongly lean toward the lump sum provided it were actuarially a fair deal.

+1

There are all sorts of "is it fair" questions to ask about taking a lump sum. If by "fair" you mean would my income be the same if I take the lump sum as it would if I take the straight pension, no it wouldn't. For me, taking the lump sum (which I would buy an IRA annuity with) is a way of hedging my bets, not of increasing my total income in retirement. Is it fair to my fellow retirement system members to withdraw cash from a system that's already in dire straits? I don't know that it is, which might in the end convince me not to do it. Is it fair to future hires to weaken an already faltering system? The City is already making noises about changing the pension plan for new hires, so I don't think what I do will affect that one way or the other.

But trumping all questions of fairness is the question of legality. If it's against the law for a pension fund in this condition to pay out lump sums, I don't have to ask whether it's fair, because they can't do it. However, perhaps ziggy29's mention of the PBGC indicates this 80% restriction only applies to pensions which are covered by that agency, which mine isn't.

 

[utrecht]

For retirees the pension monthly paymentsare funded from the investments in the pension plan. Should the plans assets fall short then the company must pay into the fund to make up the shortfall. If the company goes bankrupt then the Pension Benefit Guarantee Corporation (PBGC - a government agency) will step in to pay pensions. But they reduce payments per their schedule. It depends on how old you were when the plan went belly-up and how much your monthly payment was.

Welcome to PBGC

Rules regarding future retirees are all discussed at the PBGC website.

For example for plans terminating in 2012:

a 65 year old worker can get up to $4188/month from the PBGC
a 55 year old worker can get up to $1884/month from the PBGC
a 65 year old worker can get up to $1047/month from the PBGC

The pension plan isn't going "belly up". The plan is in good shape, but is not 100% funded. I dont think any of them are. This is a scenario that could become possible if a law is passed that makes it illegal to have a DB pension plan in Texas. Personally, I think its pretty remote that they could get a law like this on a ballot and passed, but Im trying to figure out what my benefits would look like just in case. The pension is the Dallas Police and Fire Pension so its not covered by PBGC.

 

[ziggy29]

There are all sorts of "is it fair" questions to ask about taking a lump sum. If by "fair" you mean would my income be the same if I take the lump sum as it would if I take the straight pension, no it wouldn't. For me, taking the lump sum (which I would buy an IRA annuity with) is a way of hedging my bets, not of increasing my total income in retirement.

Ultimately, by "fair" I mean from an actuarial standpoint, where the lump sum is actuarially "equivalent" to the expected income stream over a lifespan.

I'm sure that if you took the lump sum and bought an SPIA with the pretax lump sum, the payments would likely be somewhat lower than if you kept the monthly pension income. At that point the question obviously becomes: How *much* less? But in any event, being in a plan which is less than 65% funded would not be giving me warm fuzzies, unfortunately.

 

[Running_Man]

What happens when a pension fund is frozen? Who gets paid what? Obviously nobody is going to accrue future benefits, but what happens to the pension checks of people who are already retired? If the fund is 80% funded, they cant continue to get 100% of their pension checks can they? What happens to the benefits that have already been earned of someone who is already vested? What happens to the money in the pension fund itself? Is everything in the fund liquidated and the money used to buy annuities for the members? Or does the money stay invested and pension checks continue to sent out?

The reason I'm asking all of this is because there is a group in Texas trying to get a law passed banning all DB pensions. My pension happens to be one of the best run mid sized pensions in the country. Recently a survey was done and it had the highest returns of the 100 mid sized pension funds surveyed and had the 2nd lowest risk ratio. I think the survey covered the last 10-15 years. But if the law gets put on the ballot and passes, our DB pension plan will be eliminated just like all of the other ones who are mismanaged and include spiking and all of those other things that make people think every pension fund is evil.

As was mentioned earlier the 80% funding is including an assumption of future pay raises for employees and estimated lengths of service of employees to allocate for the value today a portion of the value for cases where the benefit may be a hockey-stick approach at the end of an employees career. A freeze of the pension usually results in the funding percentage to jump substantially, there is a re-measurment done at the time of the freeze. If the pension plan is at 80 percent with a freeze there may be even a gain for the company depending on how the revaluation calculation works out. However that calculation has an assumption of future return on plan assets over the length of term of the plan participants and so like any retirement plan, poor sequence could hurt the fund.

 

[kyounge1956]

Ultimately, by "fair" I mean from an actuarial standpoint, where the lump sum is actuarially "equivalent" to the expected income stream over a lifespan.

I'm sure that if you took the lump sum and bought an SPIA with the pretax lump sum, the payments would likely be somewhat lower than if you kept the monthly pension income. At that point the question obviously becomes: How *much* less? But in any event, being in a plan which is less than 65% funded would not be giving me warm fuzzies, unfortunately.

I don't remember the exact amounts and the computer they're in is in storage at the moment, but the combined total of the reduced pension plus monthly income from a SPIA bought with the lump sum is some hundreds of dollars less than the "straight" pension benefit. The amounts are not directly comparable anyway, because of the partial COLA on the pension which can't be exactly duplicated in the SPIA. I feel the same lack of warm fuzzies re: the future survival of the pension fund, which is the reason I'm contemplating the lump sum at all. It would be a hedge, and a hedge always has a cost, when compared to assuming the full risk, right? But that's all I'm going to say about that. It's off utrecht's original question, and I don't want to be a thread-jacker.

 

[Shanky]

I worked for a company that had an 80% funding level for its DB pension. Step 1, pension frozen. This meant any growth in benefit tied to age and years service stopped growing. Step 2, Health Care in retirement discontinued. Step 3. Bankruptcy, forcing the pension to PBGC. Note, with PBGC the max for younger retirees is pretty low. For example at age 55 with 50% survivor benefit, the absolute maximum is $1884 per month. Finally, for higher earners, supplemental executive retirement (deferred comp) is not protected in bankruptcy.
Net impact in my situation is at age 55, my pension will be about 25% of what it would have been & health care is canceled. At age 65, the impact is slightly less.

At the end of the day, it is not ever a matter of what is fair, or what is promised. It is a matter of what is financially viable. For many municipalities, this will likely be a messy, painful process over the next several years but it is necessary given where many pension plans & promises of health care are relative to the ongoing ability to fund them.

 

[pb4uski]

Sounds like a sad situation. Was the 80% funding a long time ago and the pension assets declined or were raided or mismanaged? The freezing of the pension should have increase the funding level from 80% to something higher so I'm trying understand how it went from pretty well funded to outrageously underfunded.

DC plans don't sound so bad once you hear stories like this.

 

[ERD50]

... Note, with PBGC the max for younger retirees is pretty low. For example at age 55 with 50% survivor benefit, the absolute maximum is $1884 per month.

What is your reference for 'pretty low'?

My pension @ 65 after 28 years at MegaCorp, with a decent salary history is about $40,000 @ 0% survivor benefit. Knock that down to $20,000 if I were to take it at 55, that's just $1,667 month before adjusting for a 50% survivor. And no COLA.

I'd say $1884 is pretty high, and it isn't a ceiling, it's just the point at which benefits are reduced (I think, I'd need to check that). edit/add: http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html OK, I guess they are maximum payouts.

-ERD50

 

[Shanky]

What is your reference for 'pretty low'?

My pension @ 65 after 28 years at MegaCorp, with a decent salary history is about $40,000 @ 0% survivor benefit. Knock that down to $20,000 if I were to take it at 55, that's just $1,667 month before adjusting for a 50% survivor. And no COLA.

I'd say $1884 is pretty high, and it isn't a ceiling, it's just the point at which benefits are reduced (I think, I'd need to check that). edit/add: Maximum Monthly Guarantee Tables OK, I guess they are maximum payouts.

-ERD50

When I say low, I mean low relative to expectations or former pay level. For those earning above ERISA limits, Suplemental Executive Retirement or Deferred comp was how the gap was made up. Those items are not protected in Chapter 11. I don't consider what happened a bad outcome as the "promises" were unsustainable. In retrospect I am happy I contributed to my 401K to the max, even though the DB Pension was to cover my retirement expenses.

 

[Shanky]

Sounds like a sad situation. Was the 80% funding a long time ago and the pension assets declined or were raided or mismanaged? The freezing of the pension should have increase the funding level from 80% to something higher so I'm trying understand how it went from pretty well funded to outrageously underfunded.

DC plans don't sound so bad once you hear stories like this.

What happened is the industry, (Multiple companies) were bleeding red ink, so contributions could not continue to fund the pensions and at the same time the assumed rate of return on investment was lowered to reflect reality. So with a stroke of the pen, 80% "funded" changes when you assume a lower return. If you look at your pension, besides funding level, look at the assumed returns. Some are still in denial and assume 8 -11 %.

 

[Shanky]

What is your reference for 'pretty low'?

My pension @ 65 after 28 years at MegaCorp, with a decent salary history is about $40,000 @ 0% survivor benefit. Knock that down to $20,000 if I were to take it at 55, that's just $1,667 month before adjusting for a 50% survivor. And no COLA.

I'd say $1884 is pretty high, and it isn't a ceiling, it's just the point at which benefits are reduced (I think, I'd need to check that). edit/add: Maximum Monthly Guarantee Tables OK, I guess they are maximum payouts.

-ERD50

Pretty low is just relative to expectations. PBGC does not cover supplemental plans like Supplemental Executive retirement and deferred comp, which are mechanisms used when pay is above ERISA limits. Those supplemental plans are not protected in bankruptcy. So $1884 would be low relative to pay. (whether you made 100K or 300K a year, the $1,884 limit at age 55 would apply to both, even though the pre-bankruptcy pension would be higher for the higher income.) Again this is not a sad story, just an example of what can happen when promises exceed the ability to pay for them. In our case, retirement is just delayed a few years or early, albeit at a lower income level.

 

[utrecht]

This thread was not supposed to be about poorly run pensions or bankrupt companies. It was supposed to be about what happens to a pension fund and the pensioners when the pension is closed. Do they continue to get their same pension check? What about people about to retire? Does the fund liquidate or continue to operate just with no new contributions? It would seem to me that if the fund is 80+% funded and the funding level goes up due to it being closed, then everyone retired or at least vested should be able to be paid all (or most) of the benefits that were promised to them, even though nobody will accrue any future benefits.

Does anyone not have a problem with a law being enacted that makes DB plans illegal?

 

[Shanky]

This thread was not supposed to be about poorly run pensions or bankrupt companies. It was supposed to be about what happens to a pension fund and the pensioners when the pension is closed. Do they continue to get their same pension check? What about people about to retire? Does the fund liquidate or continue to operate just with no new contributions? It would seem to me that if the fund is 80+% funded and the funding level goes up due to it being closed, then everyone retired or at least vested should be able to be paid all (or most) of the benefits that were promised to them, even though nobody will accrue any future benefits.

Does anyone not have a problem with a law being enacted that makes DB plans illegal?

My post was not about a poorly run pension, it was about a well run pension where the combination of lower investment earnings, increased HC costs & financial distress made it impossible to contribute enough to meet obligations. There was no spiking and the investment portfolio performed on a par with others. But when contributions needed to increase to make up for lower returns/ higher HC cost, it became untenable for a company that was struggling financially. Going from 80% funded to defunct only took a couple years.

 

[pb4uski]

This thread was not supposed to be about poorly run pensions or bankrupt companies. It was supposed to be about what happens to a pension fund and the pensioners when the pension is closed. Do they continue to get their same pension check? What about people about to retire? Does the fund liquidate or continue to operate just with no new contributions? It would seem to me that if the fund is 80+% funded and the funding level goes up due to it being closed, then everyone retired or at least vested should be able to be paid all (or most) of the benefits that were promised to them, even though nobody will accrue any future benefits.

Does anyone not have a problem with a law being enacted that makes DB plans illegal?

My understanding is that if a pension plan is frozen that the plan participants would get the benefits that they would be entitled to under the plan as if they had all resigned on the close date. If the pension plan assets were insufficient to provide for those benefits then the sponsoring company would need to make additional contribution to make up the difference. If the plan assets were insufficient and the sponsoring company was unable to make the contributions then the plan woud fall under the PBGC.

And I would have a problem with a law that made DB plans illegal. I don't see how it could be constitutional to restrict any company from providing a benefit to their employees if they chose to. The problem isn't the DB plan, it is the benefits being promised and the funding (or lack thereof).

 

[Shanky]

Ask yourself why isn't the pension fully funded. How long did it take to drop to 80%? Does the pension assume abnormally high average returns? Again the move from 100% funded, to 80% to insolvent can happen in a matter of a few years if assumptions are unrealistic, benefits cost increase, returns are sub par etc. The key is something has to change to return to 100% funding. Ideally, increased contributions make up the shortfall or benefits are trimmed.

This would make me nervous...

http://www.dallasobserver.com/2012-...ce-and-fire-pension-s-big-real-estate-gamble/

http://blogs.dallasobserver.com/unfairpark/2012/09/post_36.php