how is the health of your pension?

[ziggy29]

my brother retired around 4 years ago from the grocers union, he has a nice pension of $2800/ month with full medical. they are taking 100% of his medical away and i am afraid they will be making more cuts in the near future.

I see this as a double-edged sword. There's a part of me that feels like taking away promised retiree health insurance benefits (especially before age 65) should be illegal on those who have already retired (you may have just busted their retirement by doing so). On the other hand, if you make it impossible to take away from current retirees, many of the dwindling number of employers which still offer this benefit will pull it away from new hires and those not yet retired.

Damned if you do, damned if you don't.

As long as health insurance is foolishly tied to employment, these frustrations will continue.

My first Megacorp eliminated retiree medical for folks under 50 back around 1996 and froze my pension about year later. Yay for me.

 

[Mulligan]

The expected return on assets has no impact on how well the plan is funded. That is based on the value of the liabilities and assets on a particular date. What they hope to achieve in asset returns in the future didn't matter when you look at how well the plan is currently funded.

T

That is my understanding too, (but I am not extremely knowledgable in this matter). But in looking forward, not hitting a possible target rate of an assumed 8% return will have a future impact on how well the plan is funded down the road, correct? I know that cant just say bond rates are horrible and we have to figure that into our assumptions for the next 5 years, but ultimately it will have an impact, correct?

 

[Alan]

That is my understanding too, (but I am not extremely knowledgable in this matter). But in looking forward, not hitting a possible target rate of an assumed 8% return will have a future impact on how well the plan is funded down the road, correct? I know that cant just say bond rates are horrible and we have to figure that into our assumptions for the next 5 years, but ultimately it will have an impact, correct?

If the company is still around then it means they have to make larger contributions to keep it fully funded. This has happened a couple of times with my MegaCorps including the one that was bought out by another MegaCorp about 5 years ago. Part of the deal was that they agreed to contribute an extra $Xm /year for following 5 years and then continue to keep it solvent. The pension fund itself has not had employee contributions for many years after it was closed to newcomers in the 90's.

 

[Spanky]

What pension?

It's unfortunate that pension is becoming a distant memory in the private sector.

 

[Tif7]

That is my understanding too, (but I am not extremely knowledgable in this matter). But in looking forward, not hitting a possible target rate of an assumed 8% return will have a future impact on how well the plan is funded down the road, correct? I know that cant just say bond rates are horrible and we have to figure that into our assumptions for the next 5 years, but ultimately it will have an impact, correct?

I don’t think it will. Think of it this way - how well the plan ends up being funded down the road will depend on what the value of assets and liabilities are at that time. The expected return on assets should not change that. For example, if the plan is 100% funded today and 5 years from now it turns out to be 80% it doesn’t matter what rate of return was assumed ….2%, 8%, 20% ….you will still be at 80%.

Horrible bond rates does change the funded % for the worse, since it increases the value of the liabilities. So now you have huge asset losses and increasing liabilities cutting down the funded %.

T

 

[clifp]

The expected return on assets has no impact on how well the plan is funded. That is based on the value of the liabilities and assets on a particular date. What they hope to achieve in asset returns in the future didn't matter when you look at how well the plan is currently funded.

T

Wrong

The funding levels of pension plan are based on numerous actuarial assumption; life expectancy, wage growth, inflation, percent of current workers who leave before vesting, number of new workers hired etc etc, and one of the key assumptions is the future returns on investments. For most pension plans these were 8-8.5% a few years ago and now are 7.5-8%.

The funding level is determined after factoring in all of actuarial assumptions.

You can read about this assumption generally in the appendix or foot note section of your pension plans comprehensive financial report. (This is different than the summary that most send out). It is generally available on a website, but in some case you have to ask for them.


After reading about dozen of these over the last few years I've gotten reasonably good at understanding them.

 

[Tif7]

Wrong

The funding levels of pension plan are based on numerous actuarial assumption; life expectancy, wage growth, inflation, percent of current workers who leave before vesting, number of new workers hired etc etc, and one of the key assumptions is the future returns on investments. For most pension plans these were 8-8.5% a few years ago and now are 7.5-8%.

The funding level is determined after factoring in all of actuarial assumptions.

You can read about this assumption generally in the appendix or foot note section of your pension plans comprehensive financial report. (This is different than the summary that most send out). It is generally available on a website, but in some case you have to ask for them.


After reading about dozen of these over the last few years I've gotten reasonably good at understanding them.

Maybe we are taking about different things here. When you say funding levels, do you mean an actual funded % or are you referring to some expected future funding level? If it’s the latter then I agree, what you assume for expected future returns is key.

For actual funded %, the expected future returns don’t matter. The assets are what they are, and what you assume for future returns won’t change that.

T

 

[ziggy29]

It's unfortunate that pension is becoming a distant memory in the private sector.

And unless the fortunes of the average private sector worker stop eroding, there's probably no way to stop from happening in the public sector, too.

 

[clifp]

Maybe we are taking about different things here. When you say funding levels, do you mean an actual funded % or are you referring to some expected future funding level? If it’s the latter then I agree, what you assume for expected future returns is key.

For actual funded %, the expected future returns don’t matter. The assets are what they are, and what you assume for future returns won’t change that.

T

Imagine a pension plan which as of Dec 31, 2011 has $1 billion of assets. The fund has 3,000 retirees. The company/government changed pension plans and current employees are in a new system so this pool of money will need to fund these 3,000 retirees for the rest of their life.

If a pension is 100% funded than this amount of money will sufficient to send out retirement checks, based on assumptions of life expectancy, inflation, and rate of return. If it is 80% funded you would need 1.25 billion.

It is pretty pointless to talk about funding level of a pension without
talking about future liabilities.

We maybe talking about different things. Are you talking about the difference between the actuarial value of pension plan and the market value?

 

[John Galt III]

When laid off from MegaCorp in 1998, they had already forced us into a "cash balance" pension. As "former employees" were able to cash out anytime, or start taking monthly lifetime payments, also anytime, no matter your age, or just let it accrue interest and not touch it. I agonized over it for a few years, and decided to start taking monthly payments. So far I have been taking the monthly payments for about 7 years, seamlessly. If I get just 3 more years worth out of it, I will have matched the lump sum amount ($80,000). Of course inflation is killing me, but that went into the decision too. No Cola. I get annual statements from Mega telling me all is well with the funding, although it is actually indecipherable to me. Since the monthly amount is not large ( less than 1k) PBGC will supposedly replace all of it, month by month, should Mega decide to default.

 

[Chuckanut]

It is sad that pension benefits, already earned by the working people, can be reduced and taken away after the fact. One would think there would be strong laws requiting proper funding of pension benefits, separating the funding from the regular company assets and guaranteeing them if a company goes belly up. Yes, this might mean that pension benefits might be less than they are now, but at least the worker would know where he/she stands and that it cannot be taken away by poor management or corporate greed.

My state reformed public pensions years ago. The pension with the best 'deal' has been closed for over 35 years. The next best one is funded at 90% the last time I checked. The newest is a hybrid of defined contribution and defined benefit. It is also well funded. I pay about 6% of gross income into the plan as my contribution. This is over and above SS. Another reason why laws should be strengthened to protect pension assets - it's my current and future income at risk.

 

[Tif7]

It is pretty pointless to talk about funding level of a pension without talking about future liabilities.

I’m with you 100% on that. I’m not sure why you think I suggested otherwise.

In your example there are 1B in assets. If you say it’s 100% funded then that means there are 1B in liabilities. Let’s say all 1B of the assets are invested in Wellesley. It makes no difference if unclemick expects Wellesley to return 4%, 8%, 20% …..the funded percentage is still 100% (1B/1B in all cases).

Now, if you turn around and say it is only 80% funded that means there are 1.25B in liabilities. It does not change the fact that you have 1B in assets. And again, it does not make a difference if the expected return is 5%, 10%, 25% you are still 80% (1B/1.25B in all cases).

Now, the expected return does impact earnings. If you have 1B in assets and have a 4% expected return, you would be adding 40M to earnings. If you instead expected 20% you would be adding 200M to earnings. That sure will change my thoughts on EPS, but it has nothing to do with the funded % of the pension.

I’m not sure if everyone here is interested in this level of detail. I’ll gladly discuss over PM if you wish.

T

 

[Tif7]

It is sad that pension benefits, already earned by the working people, can be reduced and taken away after the fact.

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

 

[arebelspy]

I’m with you 100% on that. I’m not sure why you think I suggested otherwise.

In your example there are 1B in assets. If you say it’s 100% funded then that means there are 1B in liabilities. Let’s say all 1B of the assets are invested in Wellesley. It makes no difference if unclemick expects Wellesley to return 4%, 8%, 20% …..the funded percentage is still 100% (1B/1B in all cases).

Now, if you turn around and say it is only 80% funded that means there are 1.25B in liabilities. It does not change the fact that you have 1B in assets. And again, it does not make a difference if the expected return is 5%, 10%, 25% you are still 80% (1B/1.25B in all cases).

Now, the expected return does impact earnings. If you have 1B in assets and have a 4% expected return, you would be adding 40M to earnings. If you instead expected 20% you would be adding 200M to earnings. That sure will change my thoughts on EPS, but it has nothing to do with the funded % of the pension.

I’m not sure if everyone here is interested in this level of detail. I’ll gladly discuss over PM if you wish.

T

I don't think so, but maybe I'm misunderstanding what you're saying.

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?

To put it another way, let's look at an example. We have 3,000 people we need to fund for X years. It is COLA'd, so we need Y dollars earning Z% to fund that in the future. If we have Y dollars now and project we can earn Z%, we are 100% funded. If we have, say 80% of Y, we're 80% funded. HOWEVER, if we change Z% to be lower, we'll need to up Y to compensate. So say, for example, that our new projection is to only earn (Z-2)%, or whatever. Now then to be fully funded we'll need Y to be higher, or suddenly we're only partially funded.

Thus, your projected rate of return does indeed affect the amount that the pension is funded at. No?

 

[Gearhead Jim]

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.

 

[Chuckanut]

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.

 

[Midpack]

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...

 

[Alan]

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.

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.

 

[Tif7]

....
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

 

[Mulligan]

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?

 

[clifp]

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?

 

[friar1610]

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.

 

[Tif7]

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

 

[obgyn65]

I agree with this. I am not counting much on any pension. Most of withdrawals be from my savings.

It's unfortunate that pension is becoming a distant memory in the private sector.

 

[Tif7]

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