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Old 12-18-2011, 11:29 AM   #41
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This is not true, at least not in the US. Pension benefits that have been earned cannot be reduced or taken away by your employer, by law. If they go bankrupt that is a different story. In that case what do you expect? They have failed and have no more money. The PBGC steps in and covers benefits up to a certain level. It's the same as a bank failing and the FDIC covering account balances up to certain limits.

T
I see what you mean, but I must answer your question "What do you expect?"

I know the PBGC provides some pension protection and that is good. But, many have found that it is not enough protection. I have a choice to split up my savings accounts if the FDIC coverage is not sufficient to cover my savings. I have no such choice when it comes to PBCG protection.

I expect that my pension benefits are managed in such a way that the bankruptcy of my employer does not destroy those benefits. The same as I expect of my weekly paycheck. Nobody would tolerate a company going into bankruptcy saying to its employees "We are out of money, so we are taking back last year's pay from you". I think pensions should be thought of in the same way. Yes this is a radical change for many plans. But, people cannot go back into time and redo their working years. A worker deserves to be paid what he/she has earned. That is an important part of capitalism.

These protections are not a free lunch for the workers. Guaranteeing pensions may mean they are no longer as generous as today. It may mean paying into an insurance fund the cost of which further reduces benefits. But, at least people will be sure of what they are going to get. I would rather be certain that I will get $10,000 a year, than be promised $20,000 a year but have to live in fear that it may be reduced to a pittance.

And, I expect the government to protect my pension rights and keep me from from being robbed of them, just as it protects me from criminals who might rob my house. Note: Read "Retirement Heist" to find out how badly our system of pension protection has failed.
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Old 12-18-2011, 11:36 AM   #42
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It's unfortunate that pension is becoming a distant memory in the private sector.
Becoming? Under 5% for private sector in 2008 according to an NPR source (EBRI with DOL). I found other graphs that were a little less severe but the trend is undeniable (and irreversible IMO), but that ship sailed long ago...
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Old 12-18-2011, 11:40 AM   #43
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As someone may have noted, the math for a continuing pension plan is calculated differently from one that is being terminated. And other things can change.

Just before 9-11, the United Pilots Defined Benefit Plan was said to be funded something like 110%. After 9-11, the investments took a big hit and the airline got permission to suspend pension contributions for a couple of years in hopes the company would recover. We all know how that turned out. Then when the PBGC took over, they redid the math. From memory, they used the worst (pension) contract you've had within the last 5 years, then presume you retired 3 years before the plan is actually terminated. And even though I was required by the FAA to retire at age 60, the PBGC says that's an additional 5 years early based on their unbending rule of retirement at 65.

We used to ay that:
"The mission of the Pension Benefits Guarantee Corporation is to Guarantee that they never pay Pension Benefits to anone.

In the end, my particular case worked out OK. But a lot of people got horribly screwed.
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I see what you mean, but I must answer your question "What do you expect?"

I know the PBGC provides some pension protection and that is good. But, many have found that it is not enough protection. I have a choice to split up my savings accounts if the FDIC coverage is not sufficient to cover my savings. I have no such choice when it comes to PBCG protection.

I expect that my pension benefits are managed in such a way that the bankruptcy of my employer does not destroy those benefits. The same as I expect of my weekly paycheck. Nobody would tolerate a company going into bankruptcy saying to its employees "We are out of money, so we are taking back last year's pay from you". I think pensions should be thought of in the same way. Yes this is a radical change for many plans. But, people cannot go back into time and redo their working years. A worker deserves to be paid what he/she has earned. That is an important part of capitalism.

These protections are not a free lunch for the workers. Guaranteeing pensions may mean they are no longer as generous as today. It may mean paying into an insurance fund the cost of which further reduces benefits. But, at least people will be sure of what they are going to get. I would rather be certain that I will get $10,000 a year, than be promised $20,000 a year but have to live in fear that it may be reduced to a pittance.

And, I expect the government to protect my pension rights and keep me from from being robbed of them, just as it protects me from criminals who might rob my house. Note: Read "Retirement Heist" to find out how badly our system of pension protection has failed.
The PBCG insurance is pretty poor for early reitirees as you point out. For a retiree like myself, once I get to age 65 it covers 90%. (I'm well below the limit of the insurance cover). However it is pretty dismal coverage at 55, and slowly improves as you get older.
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Old 12-18-2011, 12:16 PM   #44
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....
How do you determine liabilities except by what you will have to pay out in the future? And how will you know how much you can pay out without having a projected rate of return? ......

Thus, your projected rate of return does indeed affect the amount that the pension is funded at. No?
This is where I think the confusion is coming from. A liability is what you owe. How much you can pay, and how you expect to get those funds doesn’t change the liability. If you owe 100k on your mortgage then your liability is 100k. What assets you have and what you expect to have doesn’t change how much you owe the bank right?

So, 3000 people are owed a pension for however long they live and it is COLA’d. The liability is 1B. This won’t change no matter how much assets there are or what they are expected to return. The amount owed is 1B.

The fund has 1B in assets. If it’s all invested in cash earning no interest, the expected return is 0%. The funding % is 1B assets / 1B liabilities = 100%.

Ok, now let’s say instead the 1B assets are conservatively invested and the expected return is 4%. The funding % is 1B assets / 1B liabilities = 100%.

What if the 1B in assets is aggressively invested and the expected return is 10%. The funding % is 1B assets / 1B liabilities = 100%.

In all cases your funded % is the same. The expected asset return does not change what is owed, and it does not change how much is currently available to pay what is owed.

T
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Old 12-18-2011, 12:42 PM   #45
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Some excellent info and dialogue which I have enjoyed reading. But bottom line to a layperson like me, if the fund is not hitting its assumed rate of return over a period of time you run the risk of getting a reduced pension unless there is some infusion of money provided by someone, correct? For me anyway, the concern is in the future not the now since it has 30 billion of funds. Im worried about 10-20 years from now, and that is where I think the assumptions of rate of returns come into play, in relation for the full pension check to be cut each month, correct?
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Old 12-18-2011, 02:48 PM   #46
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This is where I think the confusion is coming from. A liability is what you owe. How much you can pay, and how you expect to get those funds doesn’t change the liability. If you owe 100k on your mortgage then your liability is 100k. What assets you have and what you expect to have doesn’t change how much you owe the bank right?



T

I think you forgetting the time value money and maybe being confused as to what definitions of liability and fully funded .

Let's simplify the pension as much as possible. There are 3,000 each of whom is owe $30,000/year for the next 20 years. If they die before 20 years the money goes to the heirs/estate. If they live beyond 20 years, the pension plan has bought longevity insurance so an insurance company owes the retiree $30,000 year for the rest of their life.

3,000 x $30,000= $90 million/year is how much money the pension plan distributes each year. The total amount distributed over 20 years is $1800 million (1.8 billion).

My question is how much money does the pension plan need to today in order to be 100% funded? If I asked this question 2001 would that amount change?
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Old 12-18-2011, 04:15 PM   #47
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I have what I believe is a very healthy pension - military with COLA adjustments. However, I'm not confident it will always be worth as much as it is now. I suspect reductions in COLA are in the future.
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Old 12-18-2011, 04:28 PM   #48
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I see what you mean, but I must answer your question "What do you expect?"
Thanks for responding. It sure sucks when you don’t get what you earned! I understand why you feel the way you do. What you are doing though is judging how the current system works against an expectation of something it is not designed to do. If you want a system that guarantees your full pension benefit if your company goes bankrupt then that’s all well and good. But that is not what we have now. The system protects part of your benefit. The rest is at risk. If the company is doing fine, you get what you earned. If the company goes into bankruptcy then you receive the protected piece. If the protected piece is a fraction of what you earned then yes, that sucks. But that is not necessarily a failure of the system. Like anything else, it is far from perfect, but expecting it to provide more then it is designed to do is setting yourself up for disappointment.

T
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Old 12-18-2011, 04:29 PM   #49
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I agree with this. I am not counting much on any pension. Most of withdrawals be from my savings.
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It's unfortunate that pension is becoming a distant memory in the private sector.
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Old 12-18-2011, 04:33 PM   #50
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Some excellent info and dialogue which I have enjoyed reading. But bottom line to a layperson like me, if the fund is not hitting its assumed rate of return over a period of time you run the risk of getting a reduced pension unless there is some infusion of money provided by someone, correct? For me anyway, the concern is in the future not the now since it has 30 billion of funds. Im worried about 10-20 years from now, and that is where I think the assumptions of rate of returns come into play, in relation for the full pension check to be cut each month, correct?
I don't know. The way I see it, the company has to pony up the cash to pay what it owes. If the assets do well they have to find less money. If the assets take a beating they have to make up the shortfall somehow. As Alan said a few posts above, the megacorps he worked at are required to keep the fund solvent. So, between now and 10 or 20 years from now cash injections are going to be needed along the way if funding levels drop. I know very little about UAL’s pension problems. But from what Gearhead Jim posted the plan was 110%, assets took a huge hit, and UAL was forced to make contributions. They could not raise the cash, the plan went to the PBGC. So a companies ability to raise cash when needed matters a lot.

T
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Old 12-18-2011, 04:42 PM   #51
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I agree with this. I am not counting much on any pension. Most of withdrawals be from my savings.
Same here. My megacorp has reduced benefits a number of times already. I think it's only a matter of time before they shut it down completely. It's not COLA'd. I'm at least 20 years away from collecting anything. Whatever I have earned by the time they shut down will be worth very little by the time I can collect anything.

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Old 12-18-2011, 04:50 PM   #52
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....and maybe being confused as to what definitions of liability and fully funded.
Could be.

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My question is how much money does the pension plan need to today in order to be 100% funded?
It depends on what the liability is today right? Total payments for the next 20 years will be 1.8B, but because of the time value of money the liability will be less then 1.8B (Just as 20 years of mortgage payments will total more then a balance of 100k today.) Let’s say it’s 1.3B. I realize I'm making that number up, but we need some kind of number to work with.

To be 100% funded today, you would need to have 1.3B in assets. If you only had 1B in assets then you would be 77% funded, and if you had 1.5B in assets you would be 115% funded.

I'm curious to know what you think the numbers should be.

T
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Old 12-18-2011, 04:57 PM   #53
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Originally Posted by Tif7

Could be.

It depends on what the liability is today right? Total payments for the next 20 years will be 1.8B, but because of the time value of money the liability will be less then 1.8B (Just as 20 years of mortgage payments will total more then a balance of 100k today.) Let’s say it’s 1.3B. I realize I'm making that number up, but we need some kind of number to work with.

To be 100% funded today, you would need to have 1.3B in assets. If you only had 1B in assets then you would be 77% funded, and if you had 1.5B in assets you would be 115% funded.

I'm curious to know what you think the numbers should be.

T
...won't that depend on the rate of return then, as we've been saying all along?
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Old 12-18-2011, 05:26 PM   #54
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Originally Posted by Tif7

I don't know. The way I see it, the company has to pony up the cash to pay what it owes. If the assets do well they have to find less money. If the assets take a beating they have to make up the shortfall somehow. As Alan said a few posts above, the megacorps he worked at are required to keep the fund solvent. So, between now and 10 or 20 years from now cash injections are going to be needed along the way if funding levels drop. I know very little about UAL’s pension problems. But from what Gearhead Jim posted the plan was 110%, assets took a huge hit, and UAL was forced to make contributions. They could not raise the cash, the plan went to the PBGC. So a companies ability to raise cash when needed matters a lot.

T
Tif, for me anyways, your comments actually reinforce the importance of watching assumed rate of return. 1) I have a public pension so it does not have PBGC protection 2) Even though I have 15 years SS, the WEP would not allow a " bump up" if I had say a 50% haircut from my pension. 3) Contribution rate from emplyee and employer have already jumped 40% from 10.5% to 14.5% EACH (does anybody know of a system that has each side pay that much yearly?) so I think that option of additional cash infusion is realistically closed.
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Old 12-18-2011, 05:52 PM   #55
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...won't that depend on the rate of return then, as we've been saying all along?
+1

Many people would say that safest investment would be to be 100% invested in US treasury bonds. If the pension plan purchased $50.8 million worth of US zero coupon that mature in 2031 with a yield of 2.90%, they would have $90 million to make the last payment. To make the payment in ten years they would need $73.18 million of 10 year Tbonds with a yield of 2.09% To fund next years payments of $90 million that would need $89.910,000 thanks the the .1% yield on 1 year T-bills. Without going to through the math of adding up all of the 20 years. I'd say an average interest rate of 2% is reasonable and would require $12.1 Billion. Now if we go back to Dec 2001 when 1 year Tbills were paying 2% 10 year Tbills were 4.6% and 20 years were 5.5% . The total assets required for the same plan to be 100% funded was around $7.3 billion a big difference.

Now imagine the guy who worked for a Greek corporation and the pension plan told him say 5 years ago, we aren't taking any chances with your retirement it is entirely invested in Greek Govt bonds and 100% fully funded. They probably would not being feeling very secure about their retirement today.

This is why if I had a pension I'd want to be invested in a wide variety of assets stocks and bonds, commodities, with some international exposure so that if China did surpass the US as the #1 economy I'd benefit. Once you start investing in things without a fixed rate of returns and/or a high degree of safety like US Treasury bonds, you have to make assumptions about how much these assets are likely to make in the coming years.

Employers (especially state and local government) when they report funding levels for their pension make assumptions about future returns. The numbers they use have a huge impact on funding levels for pension plans. Government pension plans are allowed to make higher assumptions about the rate of returns than private pension plans, which is why reports on funding levels should be viewed with suspicion.
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Old 12-18-2011, 06:02 PM   #56
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What a timely discussion this is for me. Last Friday I executed one pension, and tomorrow I plan to execute the other one. Both maxed out in October 2011. I decided on monthly payments instead of a Lump Sum Distribution. I pulled my hair out with this decision, but the PBGC protection definitely factored into my decision. With world markets, and even sovereign debt, so shaky right now, I wasn't confident I could improve on the monthly pension. I know if PBGC can't fund shortages in the future, the additional layer of safety goes away. But if that happens, I'll have a lot more to worry about than my pension. So, annuity-type, non-COLA'd pension it will be, at least after tomorrow. Other savings and rental property will have to pick up the slack, or maybe DW will agree to going back to work full-time...probably not. OK, I'll grow a bigger garden.
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Old 12-18-2011, 07:57 PM   #57
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Mulligan - those are steep contributions. Hopefully it shores up the system and your benefits don't get cut in the future.

Clifp - thanks for taking the time to post your comments and calculations. It helps to get some insight into how you think about these things.

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Old 12-19-2011, 09:00 AM   #58
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There were a lot of frustrations and drawbacks to a career as a federal employee. But ... my Civil Service Retirement System (CSRS) pension is very generous, COLA'd, includes the gov't paying 72% of my health insurance premiums and DW would receive 55% of what I get if I predecease her.


grumpy, I realize it's a nozy question, but would you mind saying what grade you retired at and how many years? I'm a GS-11 and now that I'm a year away from my 55th birthday, I'm getting a little nervous. I'm also CSRS.
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Old 12-19-2011, 09:03 AM   #59
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Yes, my pension amount was reduced due to my opting to provide for a survivor annuity for my wife. But as I understand it, she would receive 55% of what I currently receive, not 55% of what I would have received had I not elected the survivor annuity. I am not really certain about this or concerned about it. Our total assets are such that, were I to die before her, she would have no money worries in any case.

Yes, I believe that's the way it works.
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Old 12-19-2011, 10:44 AM   #60
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Marty, it shouldn't make any difference what grade you retire at - if you retire under CSRS at the qualifying age with the qualifying number of years, the Govt will pay 72% of your health insurance premiums (at least until Congress messes with this or you become eligible for Medicare, which is a whole other kettle of worms). Meanwhile, a GS-2 and a GS-15 have the same options for selecting survivor annuity benefits - full survivor annuity, partial annuity, etc. etc.

Also check with your HR department at work - if you're a year away from retiring, they probably have a checklist of things to do.

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grumpy, I realize it's a nozy question, but would you mind saying what grade you retired at and how many years? I'm a GS-11 and now that I'm a year away from my 55th birthday, I'm getting a little nervous. I'm also CSRS.
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