Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Funding percentage of a pension fund
Old 07-11-2012, 11:11 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Funding percentage of a pension fund

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?
__________________

__________________
utrecht is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-11-2012, 11:30 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
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.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 07-11-2012, 11:33 AM   #3
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by utrecht View Post
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.
__________________
MasterBlaster is offline   Reply With Quote
Old 07-11-2012, 11:48 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
Quote:
Originally Posted by utrecht View Post
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.
__________________
pb4uski is offline   Reply With Quote
Old 07-11-2012, 12:31 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,264
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
__________________
ERD50 is offline   Reply With Quote
Old 07-11-2012, 05:20 PM   #6
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by MasterBlaster View Post
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.
__________________
kyounge1956 is offline   Reply With Quote
Old 07-11-2012, 06:02 PM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by kyounge1956 View Post
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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 07-11-2012, 06:21 PM   #8
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,424
Quote:
Originally Posted by ziggy29 View Post
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
__________________
MichaelB is offline   Reply With Quote
Old 07-11-2012, 06:50 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
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.
__________________
utrecht is offline   Reply With Quote
Old 07-11-2012, 07:23 PM   #10
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by utrecht View Post
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
__________________
MasterBlaster is offline   Reply With Quote
Old 07-11-2012, 07:28 PM   #11
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by ziggy29 View Post
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.
Quote:
Originally Posted by MichaelB View Post
+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.
__________________
kyounge1956 is offline   Reply With Quote
Old 07-11-2012, 07:35 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by MasterBlaster View Post
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.
__________________
utrecht is offline   Reply With Quote
Old 07-11-2012, 08:00 PM   #13
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by kyounge1956 View Post
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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 07-11-2012, 08:15 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Sep 2006
Posts: 1,689
Quote:
Originally Posted by utrecht View Post
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.
__________________
Running_Man is offline   Reply With Quote
Old 07-11-2012, 10:12 PM   #15
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by ziggy29 View Post
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.
__________________
kyounge1956 is offline   Reply With Quote
Old 07-12-2012, 09:11 AM   #16
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 229
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.
__________________
Shanky is offline   Reply With Quote
Old 07-12-2012, 09:41 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
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.
__________________
pb4uski is offline   Reply With Quote
Old 07-12-2012, 09:49 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,264
Quote:
Originally Posted by Shanky View Post
... 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/guar...guarantee.html OK, I guess they are maximum payouts.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-12-2012, 10:10 AM   #19
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 229
Quote:
Originally Posted by ERD50 View Post
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 is offline   Reply With Quote
Old 07-12-2012, 10:16 AM   #20
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 229
Quote:
Originally Posted by pb4uski View Post
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 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 03:30 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.