Pension Plan safety

[imoldernu]

While the subject doesn't affect me personally, my children are all within ten years of expecting pensions based on current or past employment. Two of them will begin receiving pensions within the next three years. I am concerned about the safety of the promised pension benefits, and would like to be able to help them check on the risks they may encounter.

One of them is expecting a federal government pension, while the other is part of a State of Illinois plan. The unfunded liabilities of Illinois pension plans has risen to 130 billion dollars, with no expectation of improvement in the future.

Other children have pensions are backed by the Multiemployer Benefits Plan guaranteed by the PBGC. The current rate of funding for payouts from this too, is much below water, with additional cuts in maximum payout in the offing, and a limited timeline for the current assets.

https://www.thebalance.com/is-my-pension-safe-2388790

The worry comes to the fore, with the recent report that 16,000 former Sears Employees in Canada may be left pensionless in the wake of the company. While the situation is different, the distress that this is causing is heart rending. More here:

https://www.thestar.com/business/2018/01/20/will-16000-sears-canada-retirees-see-their-pensions.html

While not the same situation as in the U.S. PBGC, the wider explanation in the article closely parallels the potential effect on the pensioners here.

For those who do, or will receive pensions, how do you measure the safety of this income stream?

 

[FIREmenow]

While the subject doesn't affect me personally, my children are all within ten years of expecting pensions based on current or past employment. Two of them will begin receiving pensions within the next three years. I am concerned about the safety of the promised pension benefits, and would like to be able to help them check on the risks they may encounter.

One of them is expecting a federal government pension, while the other is part of a State of Illinois plan. The unfunded liabilities of Illinois pension plans has risen to 130 billion dollars, with no expectation of improvement in the future.

Other children have pensions are backed by the Multiemployer Benefits Plan guaranteed by the PBGC. The current rate of funding for payouts from this too, is much below water, with additional cuts in maximum payout in the offing, and a limited timeline for the current assets.

https://www.thebalance.com/is-my-pension-safe-2388790

The worry comes to the fore, with the recent report that 16,000 former Sears Employees in Canada may be left pensionless in the wake of the company. While the situation is different, the distress that this is causing is heart rending. More here:

https://www.thestar.com/business/2018/01/20/will-16000-sears-canada-retirees-see-their-pensions.html

While not the same situation as in the U.S. PBGC, the wider explanation in the article closely parallels the potential effect on the pensioners here.

For those who do, or will receive pensions, how do you measure the safety of this income stream?

For me, I am monitoring an annual "funding report" that the pension is required (I think) to send me. Private company, fund sold off in 2001 to a brokerage house to manage/maintain. So far, mine has been between 98% and 113% fully funded for each of the past 5 years. Won't be a lot, but I feel very lucky. I plan to start taking it as soon as I retire (bird in the hand.....) in about 8-9 months.

 

[tinlizzy]

I have 12.75 years in the IBT Central States multiemployer fund. The rest of my credits are in a new single employer fund. UPS paid 6.3B to extract active employees from the fund in 2008. PBGC and the Treasury Dept also made UPS promise to make up the difference to those employees in both funds should Central States go bankrupt (another 3B liability) so it didnt also bankrupt the PBGC.

It sounds like my pension is safe and if i get some or all of the pension money, great, but im not counting on it regardless of the promises.

 

[Teacher Terry]

My DH and I each get one from the state of Nevada which is fairly well funded. together we get 42k/year which is a fair amount of our retirement $. I am not worried as it is written into the constitution that it can't be robbed for other things. Illinois however is in bad shape. I feel sorry for people that were expecting a certain pension and now are not getting it.

 

[ERD50]

...., my children are all within ten years of expecting pensions based on current or past employment. Two of them will begin receiving pensions within the next three years. I am concerned about the safety of the promised pension benefits, and would like to be able to help them check on the risks they may encounter.

One of them is expecting a federal government pension, while the other is part of a State of Illinois plan. ...

The Fed plan is probably the safest thing out there, the proverbial asteroid strike might be more of a worry. As far as IL state pension - which one? Not all are in bad shape, DW is in IMRF, and it has been kept out of the hands of politicians (run like a Credit Union), and they are ~ 85% funded. Though that 15% shortfall might be 'scary big' number. Per cents are more revealing here.

....The worry comes to the fore, with the recent report that 16,000 former Sears Employees in Canada may be left pensionless ...

Does the article say the pension payments may go to zero? I didn't see that. I skimmed, but near the end a lady mentioned she might be seeing a 20% cut, after collecting for 20 years. That's still a hit, but it's not "pension-less". Did I miss that, or is there some overly-dramatic hyperbole in your post?

We get annual statements on our pension funds, mine is protected by PBGC, and while things aren't as rosy as I'd like to see (100% funding assuming investments returns of 0% real). I'm also under the PBGC caps, so I shouldn't see a haircut even if PBGC took over. If they run out of money, well, we will see.

Beyond that, I don't spend too much time worrying about what I can't control. Looks like we could do fine even if pensions evaporated, there is still SS and our portfolio.

-ERD50

 

[ERD50]

I have 12.75 years in the IBT Central States multiemployer fund. ...

The PBGC rules for multi-employer funds seem quite different, and maybe offer far less protection? They don't affect me, so I never did a deep dive into the issue, but on the service it looked a bit troubling. I'm guessing they assume that a multi-employer fund is more diversified, so less protection required? But if they are related industries, they could all get hurt together.

-ERD50

 

[athena53]

I am not worried as it is written into the constitution that it can't be robbed for other things. Illinois however is in bad shape. I feel sorry for people that were expecting a certain pension and now are not getting it.

Other things can break a pension fund even if it's walled off from the employer (as most are). Pensions become underfunded due to overly-optimistic assumptions about mortality rates, lapse rates (people who leave employment too early to be vested) and- most important- interest rates. They're allowed to assume a "long-term" rate of return but many are set unrealistically high (thus underfunding the pension). While equity markers have done extremely well, pension funds must invest more conservatively, and the assets in fixed income vehicles are producing returns less than the long-term average for many years.

I'm guessing they assume that a multi-employer fund is more diversified, so less protection required? But if they are related industries, they could all get hurt together.

-ERD50

It depends- a national trucking firm in my area is in a multi-employer plan and many employers originally participating have gone belly-up. That leaves the remaining participants holding the bag for underfunded liabilities.

I've got two pensions, each about $900/month, non-COLA. I'd miss them if they disappeared but would survive. Unfortunately, one is GE, which I know has major underfunding. My hope is that "haircuts", if they occur, won't apply to smaller pensions.

 

[MichaelB]

For those who do, or will receive pensions, how do you measure the safety of this income stream?

An important question. Start by not reading news reports about pensions. They won't help answer your question.

Most pension funds must have annual audits and publish the results to their stakeholders. That audit and report are the most important sources of information for you and your children. Get those reports and read them carefully, and you'll have a much better sense of just how likely that pension commitment will be met.

 

[jollystomper]

For those who do, or will receive pensions, how do you measure the safety of this income stream?

As others have mentioned, by looking at the annual report my Megacorp provides. It has been fully funded for a good number of years. Since they stopped offering a pension benefit a while ago, they know exactly who is/will be getting the pensions and that (hopefully gives them a better handle on the required stream, so I do not see funding as an issue.

It is also guaranteed by the PBGC, but mine pension will be over the cap. But, I have modeled by retirement with a pension at the PBGC cap level. My SWR would still be low (3.25%) at the same expense level, so I will live.

 

[imoldernu]

Does the article say the pension payments may go to zero? I didn't see that. I skimmed, but near the end a lady mentioned she might be seeing a 20% cut, after collecting for 20 years. That's still a hit, but it's not "pension-less". Did I miss that, or is there some overly-dramatic hyperbole in your post?
-ERD50

I suppose you're right, but determining the current cash value of a pension plan is very difficult. Boiled down to "averages", the "average" pensioner, will see his/her total pension drop by nearly$17,000. A myriad of laws in different Canadian provinces makes putting numbers on the loss difficult.

Most pension funds must have annual audits and publish the results to their stakeholders. That audit and report are the most important sources of information for you and your children. Get those reports and read them carefully, and you'll have a much better sense of just how likely that pension commitment will be met.

The Sears Roebuck association came from my 12 year of being in the profit sharing plan in the 1950' and 60's. As a matter of interest, I looked up the most recent US Sears audit, and found this re: the pension plan funding.

Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to
make significant cash payments to some or all of these plans, which would reduce the cash available for our
businesses.
We have unfunded obligations under our domestic pension and postretirement benefit plans. The funded status
of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain
market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan
assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of
required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the
discount rate used to determine pension obligations could result in an increase in the valuation of pension
obligations, which could affect the reported funding status of our pension plans and future contributions, as well as
the periodic pension cost in subsequent years. Moreover, unfavorable regulatory action could materially change the
timing and amount of required plan funding and negatively impact our business operations and impair our business
strategy.
On March 18, 2016, we entered into a five-year pension plan protection and forbearance agreement with the
Pension Benefit Guaranty Corporation ("PBGC"), pursuant to which the Company has agreed to continue to protect,
or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant
Subsidiaries") holding real estate and/or intellectual property assets.*Also under the agreement, the Relevant
Subsidiaries granted PBGC a springing lien on the ring-fenced assets, which lien will be triggered only by (a) failure
to make required contributions to the Company's pension plans (the "Plans"), (b) prohibited transfers of ownership
interests in the Relevant Subsidiaries, (c) termination events with respect to the Plans, or (d) bankruptcy events with
respect to the Company or certain of its material subsidiaries.
The Company will continue to make required contributions to the Plans, the scheduled amounts of which are
not affected by the arrangement.*Under the agreement, the PBGC has agreed to forbear from initiating an
involuntary termination of the Plans, except upon the occurrence of specified conditions, one of which is based on
the aggregate market value of the Company’s issued and outstanding stock. As of the date of this report, the
Company’s stock price is such that the PBGC would be permitted to cease forbearance. The PBGC has been given
notice in accordance with the terms of the agreement and has not communicated any intention to cease its
forbearance; however, if the PBGC were to initiate an involuntary termination of the Plans, our financial condition
could be materially and adversely affected.

My guess is that this kind of agreement will become common, and provide some uncertainty, as go forward, particularly in the retail sector which saw nearly 700 bankruptcies and the loss of 36,000 jobs in 2017.

 

[ERD50]

... The Sears Roebuck association came from my 12 year of being in the profit sharing plan in the 1950' and 60's. As a matter of interest, I looked up the most recent US Sears audit, and found this re: the pension plan funding.


My guess is that this kind of agreement will become common, and provide some uncertainty, as go forward, particularly in the retail sector which saw nearly 700 bankruptcies and the loss of 36,000 jobs in 2017.

Well, at least from a quick read of your excerpt, it seems the PBGC is taking steps to protect the pensions. I take it the PBGC can take over certain assets if the payments to the fund are not made (the "ringed-fence")? Devil's in the details of course, but it looked reasonable at a glance.

Actually makes me feel a bit better about my pension that the PBGC has an eye on this, and seems to have some teeth.

-ERD50

 

[MichaelB]

The Sears Roebuck association came from my 12 year of being in the profit sharing plan in the 1950' and 60's. As a matter of interest, I looked up the most recent US Sears audit, and found this re: the pension plan funding.

Pension funds are completely independent, so what happens with one, like Sears or Sears Canada, has no impact on the ability of another to pay it's promised obligations. What matters is the financial state of the stakeholder's pension fund.

Pensions are a very complex topic. I urge you to look at each pension individually, and assess their ability to pay based on the actuarial report.

 

[Walt34]

For those who do, or will receive pensions, how do you measure the safety of this income stream?

At last report a few months ago it was 94% funded. My former employer can also raise taxes if needed to further fund it. But finance is one area where they are responsible, even though I often disagree with their priorities.

I sleep well at night.

 

[Curmudgeon]

I thought my (future) Megacorp pension was pretty safe, but some quick Googling shows that it is underfunded, by ~50%. But this company makes billions of dollars per year in profits (more than the total underfunding). What does it mean, here, to be underfunded? I don't get how a company with this much cash can have an underfunded pension, or what it says about their intention to pay those pensions...

 

[ERD50]

I thought my (future) Megacorp pension was pretty safe, but some quick Googling shows that it is underfunded, by ~50%. But this company makes billions of dollars per year in profits (more than the total underfunding). What does it mean, here, to be underfunded? I don't get how a company with this much cash can have an underfunded pension, or what it says about their intention to pay those pensions...

As MichaelB pointed out - look at the actual annual report. What does that report say?

If it is actually only 50% funded per their measures (and not some random google response), then it seems the PBGC should be forcing them to up their contributions. If not, why not?

What does that report say?

-ERD50

 

[tinlizzy]

The PBGC rules for multi-employer funds seem quite different, and maybe offer far less protection? They don't affect me, so I never did a deep dive into the issue, but on the service it looked a bit troubling. I'm guessing they assume that a multi-employer fund is more diversified, so less protection required? But if they are related industries, they could all get hurt together.

-ERD50

Yes, I do think everyone thought multiemployer plans were invinsible. We associate Teamsters with truckers but they cover an array of business types. If a company is diverse and its employees can be represented by multiple unions they frequently pick just one to cover all employees. Hostess, Kroger and construction workers were/are an example of Teamster covered employees.

PBGC for multiemployer plans is projected to be bankrupt in 2025. 21% of multiemployer funds are red zoned covering 1.2 million people. Central States is the largest multiemployer pension plan covering 410,000 and they're also projected to be bankrupt in 2025. There are just too many ophan pensioners whose companies went bankrupt and are no longer contributing to the funds.

The largest monthly pension guarantee in Central States was $3,000 for UPS drivers, imo hardly exorbitant for a worker making $90K/yr. (Only 44,000 UPS drivers were covered under Central States in the midwest. Drivers in the rest of the US are covered under other Teamster plans).

 

[gayl]

Our pension fund is 85% funded as of 12/31/16 ... should be better after last year. A fee things have happened since the 2008 scare.
(1) retirees after 6/1/04 can have their payout reduced if it falls below a certain %. I left 2/19/04 but had to write a check retirement day to bring my share up to 90%. Thought of it like buying an annuity
(2) formula reduced so retirees will get less (no more spiking)
(3) heathcare no longer a lifetime benefit
(4) maximum payout initiated? (No idea how that works)
(5) invests in more conservative bonds after 11/1/16 (last modification)

In that my pension is only 3k a month, I'm not worried

 

[Hermit]

My non-cola pension is about half my annual income. What will hurt me most, IMHO, will be inflation. The pension fund is well funded and MegaCorp put a bunch of money into it a few years ago. When I turn 70 in a couple of years and start SS on my account, I will be in pretty good shape, but total available real spending will decrease going forward both from the pension and likely from SS although to a lesser extent.

 

[googily]

My Megacorp was bought by a new owner who has a deeply held antipathy toward the entire notion of pensions. Even though a huge chunk of change to help fund the pension was provided to the new ownership as part of the sale, and even though the old owners had stopped providing pension coverage to new employees a few years prior, the new owner froze the pensions of all employees covered and still working. Meaning that we can work for another 20 years and our pensions won't grow. (There are other cash balance-type programs now.)

I would not be surprised if at some point the new owner starts trying to buy out the pensions still waiting to be paid.

At one time our pension was massively overfunded, and I think still is, so it's all pretty ridiculous. But certainly makes a decision to bolt a lot easier.

 

[kcowan]

After 25 years, our plan is 97% funded. We are starting an advisory committee to oversee the funds now that the government (our friends?) has reduced the funding requirement to 85%. I expect to be reliant on them for another 10 years. I have no concerns about liquidity. It is non-COLA so it has become a small factor after 25 years. We could survive without the $58k a year but would prefer not to.

 

[MichaelB]

A couple more comments. First, the funding level is the product of actuarial assumptions, so you need to take a hard look at those and make sure you are comfortable that they are realistic and achievable. You also need to look at the asset allocation of the funds, and ask yourself if that allocation will lead to the expected returns. You should look to quantify just how much of the assets are allocated to investments that are not highly liquid, as the market value of those may be questioned.

Even then, if you are concerned about the security of those future benefits, you should look separately at the value of the base pension, any COLA, and the value of health care benefits. Organizations that extend pension benefits find it difficult to reduce base pensions, but not as challenging to reduce the value of healthcare benefits, and given the cost of healthcare, that could have a considerable financial impact on a retiree.

 

[indiajust]

If at all possible, I would roll to an IRA. I prefer cash to promises. Feds own a printing press, only concern is inflation there.

 

[Turboslacker]

The PBGC isn't a guarantee either no more than social security. It's a form of insurance that in inself and implode under insolvency and Congress and screw with the cap levels and payout amounts thru legislative action.

I'm in the camp of cashing out a pension and having more control over your money, more potential to mitigate loss of future spending power, and lastly can pass on to children unlike a pension.

 

[HGTVfan]

My company pension plan is very underfunded. I don't have the annual funding notice in front of me, but it was about 75%. The company has not made contributions for several years and the PBGC has liens against the properties. So things don't sound good.

For me the good news is that my pension, which I've already been collecting for nine years, is a very small part of my retirement. It is small in part because I retired early. There is no COLA so it's value will diminish over time.

A friend who retired about a year ago and had a much higher salary relies on this pension much more. Not good news for her.

This is one reason why I'm planning to wait until 70 to collect SS.

 

[athena53]

Even then, if you are concerned about the security of those future benefits, you should look separately at the value of the base pension, any COLA, and the value of health care benefits. Organizations that extend pension benefits find it difficult to reduce base pensions, but not as challenging to reduce the value of healthcare benefits, and given the cost of healthcare, that could have a considerable financial impact on a retiree.

This. My brother and his wife are now paying $22K/year for ACA coverage because his former employer abruptly quit providing retiree health insurance. Fortunately they were savers and they spend modestly but it was still a shock and is probably far worse for people who retired only on SS.

But back to the OT- two nights ago at meeting I heard a sad tale of one of our neighbors who retired under the Federal Railroad system. His pension has been cut twice- once 30%, once 40%. He's putting his house up for sale.