Your Pension Plan

[Animorph]

Special guest post at Wade Pfau's blog, Larry Frank on viability of annuity providers:

Retirement Researcher Blog: Larry Frank Guest Post on Viability of Annuity Providers

"At the moment, immediate annuities are such a small percentage of assets that any blow ups can be almost absorbed by the insurance company. However, with the great push by legislatures and the insurance industry to “solve the retirement problem, ”the volume of assets may get so large that it becomes too big to fail. The promised payouts may exceed assets on such a large scale that it overwhelms both insurance companies and State guarantee associations."

[brewer12345]

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Originally Posted by ronocnikral I also recently read, perhaps here, that pension plans are being pinched by the low interest rate environment.

This is right on the money. Funding levels are calculated by comparing asset value to the present value of the future payout liability. Even if nothing else changes, a decline in the interest rates you use to discount the future payouts will reduce reported funding levels. With long termm interest rates way down, this has pressured otherwise solid pension plans. If we continue to see long term rates grind upward, pension plans should report better funding levels in future years.

[SumDay]

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Is it taken over by Prudential,

Alan, it was taken over by Prudential. No GM or PBGC involvement, liability, etc. It's all on Prudential.

[kyounge1956]

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Originally Posted by Tadpole I'm confused. I thought state and local governments didn't participate in PBGC. I don't think federal government pension plans are backed by it.

AFAIK, this is correct. I specifically asked whether my City pension is covered by the PBGC, and was told that it is not. I don't know about Federal pensions.

edited to add a quote from the article linked by imoldernu in #11

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Checking State/Local Program Guarantees In state/local-sponsored DB plans, there is no uniform guarantor like the PBGC standing behind promises to pay benefits. If a town or county goes broke and can't pay pension benefits, participants must look to state statutes for relief. Here, they would find a maze of legalese. In a few states, the law is clearly favorable for pensioners by stating: "Membership in employee retirement systems of the State or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems shall not be diminished or impaired." This language requires the state to use its taxing power to make good any pension benefits, if necessary. On the opposite extreme are states that treat pension rights as gratuities - meaning workers have no contractual right against the state. In between are states that provide no constitutional or statutory protections but do have strong histories of case law protecting public pensions. The NCPERS provides a useful summary of provisions in all 50 states.

[Mulligan]

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Originally Posted by Tadpole I'm confused. I thought state and local governments didn't participate in PBGC. I don't think federal government pension plans are backed by it.

My understanding of this matches yours. I have a state pension and it does not have the backstop protection from PBGC. Fortunately it is mostly prefunded in its own trust, and not commingled with other pension funds.

[Alan]

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Originally Posted by SumDay Alan, it was taken over by Prudential. No GM or PBGC involvement, liability, etc. It's all on Prudential.

Cool, I would be happy with that arrangement.

[jollystomper]

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Originally Posted by pb4uski While I have the utmost confidence my pension plan and its sponsor (one of my former employers), even if I didn't there probably wouldn't be much that I could do about it other than factor its stability into my planning. I've never been one to fret too much about things that I cannot control or influence.

+1

[rodi]

I have an unusual circumstance. My pension (long frozen, portable pension) is managed by the company that we spun off from. It was underfunded from before the time of the split... I read with dread, each year, as the funding percentage got worse over time. 79%...75%... 70% funding.... Ruh Roh.

While it was underfunded former employees could only roll out 1/2 of the lump sum - the other half remained as an annuity/pension payment. You had no choice if you wanted to pull out money.

The other company pumped in enough money that it's now funded fully. That's what I consider unusual... A success story for a pension. So if I wanted to roll out the lump sum, I could roll out the whole thing. At this point I'm letting it ride since it will provide a (very small) third leg of my 3 legged stool.

It definitely makes you nervous to see funding levels go down... and make you less nervous to see them recover.

[martyb]

I will have 2 pensions, both federal. One, I can begin anytime now, since I just reached age 55 last month, and have nearly 36 years time with my employer, Department of Defense (DoD). That is my federal employee pension. The other one (military reserves), I will begin at age 60, still 4 yrs, 11 months away. Both are (at least for now) COLA'd. There is some serious talk of tinkering with the formulation for the COLA's, so I expect that means a little less of a COLA in the future.

Nonetheless, even with the budget circus going on in DC right now, I suppose my pensions are relatively safe, in terms of at least being there in some form. I don't have SS to look forward to though (except possibly $200 or so), since I don't currently pay into SS, and as a federal employee, I'm affected by the WEP.

Wife has no pension, only 401k, and most likely we'll be using it to pay off a house when she retires in a few yrs. She's covered by survivor benefits of both my pensions, plus her own SS. With no mortgage, survivor's bens & her SS, plus life insurance, she will be ok. We don't lead extravagant lives.

[pb4uski]

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Originally Posted by Alan Cool, I would be happy with that arrangement.

I wouldn't be happy. I would be ecstatic!

[JOHNNIE36]

Alan, thanks for your post on the GM pension "sale" to Prudential. It is a sale because GM purchased annuity for me and no longer has any ties to the pension program. I agree with other posters that I am better off under the Prudential plan than if GM was still funding the plan.

[Alan]

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Originally Posted by JOHNNIE36 Alan, thanks for your post on the GM pension "sale" to Prudential. It is a sale because GM purchased annuity for me and no longer has any ties to the pension program. I agree with other posters that I am better off under the Prudential plan than if GM was still funding the plan.

You're welcome. I have 4 private pensions, all dependent on my ex-companies to keep them funded. 2 of them are in the UK which has a similar insurance scheme to the PBGC.

[BLS53]

Having PBGC cover federal pensions would be redundant wouldn't it? As I understand it, PGBC is run by the federal government. The only thing that would result in a loss of federal pensions, would be failure of the government. I imagine PBGC, along with every other government entity would cease to exist at that point. I doubt that the Chinese, or whatever flag we end up under, is going to honor such obligations, PBGC or otherwise.

[ERD50]

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Originally Posted by BLS53 Having PBGC cover federal pensions would be redundant wouldn't it? As I understand it, PGBC is run by the federal government. The only thing that would result in a loss of federal pensions, would be failure of the government. I imagine PBGC, along with every other government entity would cease to exist at that point. I doubt that the Chinese, or whatever flag we end up under, is going to honor such obligations, PBGC or otherwise.

For feds pensions, it would be sort of redundant - but just to be clear ...

Yes, PBGC is run by the govt, but the funding comes from the private pensions themselves. Basically, the companies are paying insurance premiums to PBGC, an annual $ amount per employee in the program, and maybe some other factors (details are on the site). And the laws of economics would tell us that the employees are effectively paying some/all of that from salary they would have received otherwise.

So there has been no 'government bailout' of any PBGC secured pension (to date), the money comes from the sum of the insurance payments. Now, if push came to shove, and the PBGC ran out of funds, there might be a bailout talk in the future, but who knows?

I suppose the Fed could set up a similar plan, but it probably doesn't make much economic sense - it would just be 'compartmentalizing' the money (there might be some mental advantage/transparency to that). But I think it makes a LOT of sense for other municipalities. The PBGC would have forced them to maintain funding, and that would have averted some of the kick-the-can non-antics that places like IL have taken. There would be more transparency if constituents had to fund these at those levels (and, I think that would have led to some push-back against the pensions that offer much more than most private pensions). And the pensioners deserve some backing for the promise that was made.

-ERD50

[ziggy29]

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Originally Posted by BLS53 Having PBGC cover federal pensions would be redundant wouldn't it? As I understand it, PGBC is run by the federal government. The only thing that would result in a loss of federal pensions, would be failure of the government. I imagine PBGC, along with every other government entity would cease to exist at that point. I doubt that the Chinese, or whatever flag we end up under, is going to honor such obligations, PBGC or otherwise.

Sort of, but it can be a "shell game" like Social Security where the left hand takes from the right hand, so to speak -- you've just shifted where the money is. Still, if we reached the point where entities like PBGC, FDIC and even Social Security can't be backstopped, they would be among the least of our concerns.

[BLS53]

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Originally Posted by ziggy29 Sort of, but it can be a "shell game" like Social Security where the left hand takes from the right hand, so to speak -- you've just shifted where the money is. Still, if we reached the point where entities like PBGC, FDIC and even Social Security can't be backstopped, they would be among the least of our concerns.

Yeah, that's the point that the anti-entitlement crowd doesn't seem to understand. If it gets to the point checks can't be mailed out, there isn't going to much of the nation left anyway. It's a lot more complicated than an airline finding a friendly bankruptcy judge to void their pension obligations.

[jazz4cash]

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Originally Posted by SumDay Alan, it was taken over by Prudential. No GM or PBGC involvement, liability, etc. It's all on Prudential.

http://www.pionline.com/article/20120822/REG/120819895

GM transferred $29B to Prudential to cover $26B in obligations. Basically they purchased an annuity from Pru to cover thier obligation! The transfer to Prudential was done to clean up GM's books post BK. Having such a large variable liability on the books was bad for the new GM stock. I have a friend that is a GM retiree and they got an option to take a lump sum if they were uncomfortable with the change to Prudential. I think the lump sum would be more attractive if GM was going to carry the obligation.

[Alan]

Jazz4, SumDay - thanks for the info on GM and Prudential

[JOHNNIE36]

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Originally Posted by jazz4cash http://www.pionline.com/article/20120822/REG/120819895 GM transferred $29B to Prudential to cover $26B in obligations. Basically they purchased an annuity from Pru to cover thier obligation! The transfer to Prudential was done to clean up GM's books post BK. Having such a large variable liability on the books was bad for the new GM stock. I have a friend that is a GM retiree and they got an option to take a lump sum if they were uncomfortable with the change to Prudential. I think the lump sum would be more attractive if GM was going to carry the obligation.

The lump sum distributions were only available depending on your retirement date. I was not eligible because I retired in 1988 and I think you had to retire after to 2000 in order to be offered the lump sum. Don't remember the details.

[jazz4cash]

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Originally Posted by JOHNNIE36 The lump sum distributions were only available depending on your retirement date. I was not eligible because I retired in 1988 and I think you had to retire after to 2000 in order to be offered the lump sum. Don't remember the details.

Sounds about right.....I do know some GM retirees that did not get the option.

Reviewing the link on the GM / Prudential deal, it was widely viewed as a way for large pension plans to get out from under the burden of maintaining a DB plan. Probably not the first time it's been done that way but I think maybe it was one of the larger deals. Newer retirees would presumably have a longer benefit period making them better candidates to be annuitized. I can't think of any downside to an annuity if someone else is buying it for me.