Pension Plan Safety

[imoldernu]

Illinois finances are very questionable. Since my son works in a law firm that provides risk management services to part of the state operations, I wondered about the safety of his pension, as he will retire next month. Fortunately, his pension is provided for separately from the state plans, and checking the safety of the plan puts the safety factor above the 95% level.

Looking beyond that, on searching the term "Pension Plan Safety", there are many websites that discuss the subject. That said, centering in on all of the variables brought me to this government link, which answers most of the basic question about pensions, and pension safety. PBGC = Pension Benefit Guarantee Carporation.

https://www.pbgc.gov/wr/benefits/gua...anteed-pension

Too many factors to mention here, but one factor is the maximum benefit that is guaranteed under the plan. $60,000.

A secondary thought is the current safety of the PBGC itself...

Quote:

PBGC is not funded by general tax (link is external) revenues. Our funding comes from (1) insurance premiums paid by companies whose plans we protect; (2) investments; (3) assets of pension plans that we take over as trustee; and (4) recoveries in bankruptcy from the companies formerly responsible for the plans. Your insured plan remains protected even if your employer fails to pay the required premiums.

The current status of the PBGC:

Quote:

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United ... 57 multiemployer pension plans. The agency's deficit increased to $76 billion. It has a total of $164 billion in obligations and $88 billion in assets.

Probably not a bad idea to check the current safety level of existing plans, as being inclusive in retirement planning.

Quote:

Your plan administrator must provide participants with an Annual Funding Notice about your defined benefit plan. The notice provides the following information: (1) how well your pension plan is funded; (2) the value of your pension plan's assets and liabilities; (3) how your pension plan's assets are invested; and (4) the legal limits on how much PBGC can pay if your pension plan ends.

.................................................. .................................................
I am reminded of my best friend's neighbor who had been a pilot for United Airlines, for his entire working career. He planned to retire with a 6 figure pension in 2006, and accordingly had purchased a very expensive home as well as cars etc, etc. When UA went bankrupt in 2005, the pension plan was turned over to the PBGC, which (as I recall), had a maximum payout of about
$40K.

[Texas Proud]

Just to let you know.... that funding letter is not as helpful as you might think....

Mine had 4 calculations and two were in the 75% range... two others were in the 105% range... there was not normal speak in the letter that I could see that explained what the 4 options were calculating....

[ERD50]

I'm never sure what to make of this: '(PBGC's) deficit increased to $76 billion. It has a total of $164 billion in obligations and $88 billion in assets.'

Is the $164 billion in obligations 'only' a potential liability? If so, based on what? Is there some assumption on the number of companies that might need to draw from the fund, and how much?

AFAIK, PBGC doesn't just let a company run their pension to zero, and then take over. They get involved when funding gets low, so generally are only covering a portion of the liability in the case of a bankruptcy.

And although the United Pilots took a serious haircut from what they expected as their final pension, it was a special case. A combination of a high salary, and (at the time) forced retirement before 65 made the cut bigger than many would face. If your pension doesn't exceed the max, you are whole, they don't take a % of everything, it's strictly a cap.

-ERD50

[Chuckanut]

Quote:

Originally Posted by imoldernu .................................................. ................................................. I am reminded of my best friend's neighbor who had been a pilot for United Airlines, for his entire working career. He planned to retire with a 6 figure pension in 2006, and accordingly had purchased a very expensive home as well as cars etc, etc. When UA went bankrupt in 2005, the pension plan was turned over to the PBGC, which (as I recall), had a maximum payout of about $40K.

Read the book "Retirement Heist".

If you have any doubt that the big boys and girls can tilt the playing field to their advantage this book will eliminate it. Crony Capitalism at its best.

[ERD50]

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Originally Posted by Chuckanut Read the book "Retirement Heist". If you have any doubt that the big boys and girls can tilt the playing field to their advantage this book will eliminate it. Crony Capitalism at its best.

From the discussions I've read of that book, it is a lot of sensationalist fear mongering filled with confirmation bias for people who already hate capitalism.

As I recall, they take cases where the PBGC has determined the companies over-funded per the guidelines, so allow the companies to take this 'excess' from their reserves (reasonable - that's what the guidelines are there for). The book then turns this into some kind of a "heist". And they blur the line, describing an act of "reducing the formula for benefits earned going forward, but retaining all earned benefits" (something my MegaCorp did several times) as "reneging on promises" and making it sound like they took what was already earned. As far as I know, there are no cases of that, post PBGC.

-ERD50

[imoldernu]

Quote:

Originally Posted by ERD50 From the discussions I've read of that book, it is a lot of sensationalist fear mongering filled with confirmation bias for people who already hate capitalism. As I recall, they take cases where the PBGC has determined the companies over-funded per the guidelines, so allow the companies to take this 'excess' from their reserves (reasonable - that's what the guidelines are there for). The book then turns this into some kind of a "heist". And they blur the line, describing an act of "reducing the formula for benefits earned going forward, but retaining all earned benefits" (something my MegaCorp did several times) as "reneging on promises" and making it sound like they took what was already earned. As far as I know, there are no cases of that, post PBGC. -ERD50

A bit of nitty gritty... going back to 1987, I think...
I used to ride the train into Chicago daily, with an accountant for the Chicago schoolbus system, who was nearing retirement. As I recall, he told about how his retirement plan was very much overfunded, and that the projected value was more than 150% of the needs. The board of directors okayed a diversion of millions of dollars in fund assets, to stockholders. It was during a peak market, which suddenly dropped. At the low point, this reduced the fund from 150% to about 50%.... endangering his retirement. I don't know what happened, as I left my job shortly thereafter and didn't see him again.

The PBGC system is over my head, so most of this is pretty fuzzy to me.

[ERD50]

Quote:

Originally Posted by imoldernu A bit of nitty gritty... going back to 1987, I think... I used to ride the train into Chicago daily, with an accountant for the Chicago schoolbus system, who was nearing retirement. As I recall, he told about how his retirement plan was very much overfunded, and that the projected value was more than 150% of the needs. The board of directors okayed a diversion of millions of dollars in fund assets, to stockholders. It was during a peak market, which suddenly dropped. At the low point, this reduced the fund from 150% to about 50%.... endangering his retirement. I don't know what happened, as I left my job shortly thereafter and didn't see him again. The PBGC system is over my head, so most of this is pretty fuzzy to me.

Yes, but a Chicago pension would not be under PBGC, so it's really a different animal. But I'd be very wary of any pension funded by IL (or any other state near the bottom of the list). DW will get a small pension for the Illinois Municipal Retirement Fund, and somehow they kept control of this system away from the politicians and bureaucrats (it seems to be run more like a Credit Union?), and it is reasonably well funded.

I agree that the guidelines for pension funding may be too lax (I think they should assume no more than keeping pace with inflation for the returns), but if a pension under PBGC fell that low, the company would be required to fill it back up.

-ERD50

[pb4uski]

The PBGC is a bit of a sham IMO. Its obligations for existing plans that it has taken over exceed its resources by $80 billion but it stays afloat because of continuing premiums paid by other pension plans. Let's put it this way... if it was a commercial insurer it would have been taken over by regulators long ago.

As long as there is not a big run of troubled pension plans it may muddle through, but if there is a run of troubled plans they will need to look to taxpayers for a bail-out... which may or may not happen.

[ERD50]

Quote:

Originally Posted by pb4uski The PBGC is a bit of a sham IMO. Its obligations for existing plans that it has taken over exceed its resources by $80 billion but it stays afloat because of continuing premiums paid by other pension plans. Let's put it this way... if it was a commercial insurer it would have been taken over by regulators long ago. As long as there is not a big run of troubled pension plans it may muddle through, but if there is a run of troubled plans they will need to look to taxpayers for a bail-out... which may or may not happen.

(on the bold part) - Isn't that how insurance works? They collect premiums from all the participants, the premiums fund the ones that need to collect. How does that make it a sham?

I'm still wondering about the 'obligations'. Is that total obligations, or some assumption of X% needing Y% of help in the future? You seem to indicate this is it's obligation for current 'failures'? But are current payments sufficient to cover that and future assumptions? Or?

-ERD50

[imoldernu]

A little off-topic, but something Y'all might find interesting. I was looking for interest rates, and found this WSJ site (almost endless) website that gives interest rates for virtually every kind of interest rate, from credit cards, to mortgages, to federal prime rate, and a lot more, in between.

Not just current rates, but historical rates back as far as 1947. I used it to try and figure out what I was paying or borrowing in the past. I've bookmarked it for future reference, as it give some insight into history, and how our lives adjusted to the changes.

United States Prime Rate History

[pb4uski]

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Originally Posted by ERD50 (on the bold part) - Isn't that how insurance works? They collect premiums from all the participants, the premiums fund the ones that need to collect. How does that make it a sham? I'm still wondering about the 'obligations'. Is that total obligations, or some assumption of X% needing Y% of help in the future? You seem to indicate this is it's obligation for current 'failures'? But are current payments sufficient to cover that and future assumptions? Or? -ERD50

No that is not how insurance works. With insurance, you need to at any point in time, have assets that exceed your obligations plus capital as a buffer in the event that you have adverse experience (actual experience turns out worse than your reserve assumptions).

The liabilities that it records are principally for plans they have taken over, but they also provide for probable insolvent plans (plans on the brink of collapse that haven't yet fallen into insolvency... about $60 billion).

As an example, the actuarial liabilities of the PGBC (the pv of future claims for plans that they have already taken over) is ~$180 billion. Broadly, a commercial insurer would have assets of 105-110% of its liabilities... so say $190-200 billion for the PBGC... and they have only $100 billion of assets.

Note that even if you carve out the $60 billion of probable insolvent plans that they still have insufficent assets to pay benefits for the plans that they have already taken over.

The PBGC's financial statements are on pages 53-102 of this link: https://www.pbgc.gov/sites/default/f...ual-Report.pdf

[Telly]

Quote:

Originally Posted by Texas Proud Just to let you know.... that funding letter is not as helpful as you might think.... Mine had 4 calculations and two were in the 75% range... two others were in the 105% range... there was not normal speak in the letter that I could see that explained what the 4 options were calculating....

That's odd, my little pension's plan has 3 8.5 x 11" pages on my plan. Up until a few years ago, pension plans used a 2 year average of interest rates to determine liabilities. Then came the (as Dave Barry said "I am NOT making this up!") federal law named... Moving Ahead for Progress in the 21st Century Act (MAP-21). When I hear politicians come up with a name like that, roll pants legs up, hold breath, and guard all private areas

MAP-21 uses a 25 year average of interest rates. So if rates are historically low, the employers need to contribute declines/disappears, as the Funding Target Attainment Percentage goes way up.

An example: FTAP for year ending 2016 without MAP-21 = 96.7%. WITH MAP-21, = 110.9%. So required minimum contribution for the plan = 0$ for 2016... and 2015... and 2014!

[ERD50]

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Originally Posted by pb4uski No that is not how insurance works. With insurance, you need to at any point in time, have assets that exceed your obligations plus capital as a buffer in the event that you have adverse experience (actual experience turns out worse than your reserve assumptions). The liabilities that it records are principally for plans they have taken over, but they also provide for probable insolvent plans (plans on the brink of collapse that haven't yet fallen into insolvency... about $60 billion). ....

Thanks. I understand what you are saying, but isn't this case a little different? Normally, an insurance co would need to make a lump sum payment to cover the insured loss ( a house, car, etc), so they need that money on hand. But when the PBGC takes over, they are making payments over time (some won't be due for years for those not claiming the pension yet). So it seems OK to me (to a degree) that they can count on some of the income stream from future premiums to pay these future benefits.

Another way to say that - an ins co only needs to have enough on hand, and have incoming premiums to cover that year's outgoing payments (assuming stable year-to-year average losses/premium for simplicity). They don't need to have enough to cover losses 10 years from now, that will come from future premiums. For the PBGC, they can pay future benefits with future premiums as well, right?

Of course, the assumptions may be far to lenient, resulting in big problems down the road. As I recall, the PBGC management was looking for a modest increase in premiums now (needs Congressional approval), to provide future stability. But the way things go, it will likely have to get to crisis mode first, which makes it much more painful to fix.


I've never managed to get through their financial statements - is everything converted to NPV?

-ERD50

[pb4uski]

Yes, everything is converted to NPV.... so we are comparing the pv of the assets (or perhaps better thought of as the pv of the asset cash flows) to the pv of the obligation to pay pension benefits for insolvent plans.

If a commercial insurer had a contractual obligation to make pension payments they would need to have both assets equal to the expected pv of the pension payments they are obligated to make plus a certain amount of surplus... if expereince was adverse and it resulted in a reduction in surplus at some point regulators would demand a remediation plan and at a lower level they would walk in the door and take the keys. The PBGC has $79 billion negative net worth... what else can I say.

[ERD50]

Quote:

Originally Posted by pb4uski Yes, everything is converted to NPV.... so we are comparing the pv of the assets (or perhaps better thought of as the pv of the asset cash flows) to the pv of the obligation to pay pension benefits for insolvent plans. If a commercial insurer had a contractual obligation to make pension payments they would need to have both assets equal to the expected pv of the pension payments they are obligated to make plus a certain amount of surplus... if expereince was adverse and it resulted in a reduction in surplus at some point regulators would demand a remediation plan and at a lower level they would walk in the door and take the keys. The PBGC has $79 billion negative net worth... what else can I say.

OK, thanks, I have a better understanding now.

Except there must be so much guesswork to determine future obligations, no one can know how bad these companies might get, though I suppose with fewer and fewer pensions like this, that exposure is dropping (or soon to be).

-ERD50

[pb4uski]

Actually, for the insolvent plans since they know the contractual benefit, the key assumptions are a discount rate and mortality and both are reasonable predictable... the rest is just math. Pretty easy compared to other reserves that insurers have to calculate (like LTCI reserves for instance).