How safe is a pension?

[DayDreaming]

This might be a dumb question but I've never been sure just how safe a pension is.

I'm 47, leaving my job of 25 years next week - not ER yet, but moving to another company. With my current employer, I have a pretty good pension that I can start collecting as early as age 55.

Will that pension still be there at same value I expect it to be when I want to start collecting it at 55, 60 or 65? It's a big pharma, unlikely to ever go bankrupt but fairly likely to be bought out or merged into an even bigger pharma. Are pensions protected by the U.S. government, or is that only for government pensions?

 

[pedorrero]

I'm no expert, but i play one on the boards

In general, most private pensions are covered by the PBGC, which is badly overtaxed the past few years due to ...

Large companies defaulting (or going bankrupt) and sticking the government with their pension liabilities. The PBGC may or may not cover all pensions (you could probably find out), and certainly will not guarantee the same level of benefits.

We (the country) are probably entering a long term period of inflation and broken promises -- and many of these could include government promises. The private sector is broken too -- just look at the ongoing fiasco with mortgages and bonds and the shady companies that sold and, supposedly, insured them.

In short, you have reason to worry about the future of your company and/or your pension...but there is probably not much you can do about it, except to try to save up some money of your own that you can invest and control as you see fit.

 

[W2R]

I agree with pedorrero.

The Wikipedia article on the Pension Protection Act of 2006 is here:

Pension Protection Act of 2006 - Wikipedia, the free encyclopedia

Basically, I think you have a good chance of getting your pension, but I would not count on it for ER computations. The last thing you want to do is to go into retirement, and then find out years later that you won't be getting your pension after all and that you needed it to make ends meet.

 

[martyb]

Depends. Mine (pensions) are US government (when I retire) and although it's possible, it's unlikely they will go away. I guess with private industry pensions it's relative to the strength and financial health of the particular company. Don't know if there's government protection, but I'm sure there is some kind of insurance that corporations may/are required to use to cover losses. I'm shooting from the hip hear, somebody who knows much more about it will come along....

 

[martyb]

wow! I'm really a slow typer!

 

[lazygood4nothinbum]

mine is in a well-funded plan of a large & old & fiscally conservative mcfortune5 company so i'm comfortable it will be there later. otherwise i'd wonder about it.

 

[Alan]

I'm certainly counting on my company pension in 2 years time. You should be getting annual statements clearly showing the health and funding level of your plan. It is possible that your pension plan could change before you retire, many companies are getting out of final salary schemes.

Personally I prefer the cash balance type of scheme making it much easier to transfer or roll over into an IRA. I am currently drawing one pension, expect to RE and draw from my employer's plan at 55 and have a 3rd pension from another employer due at age 65.

I've also saved hard and invested so the failure of the main company pension scheme will not be a disaster. (the 2 smaller pensions amount about $18K so are not insignificant either)

 

[Delawaredave5]

Will that pension still be there at same value I expect it to be when I want to start collecting it at 55, 60 or 65? quote]

I think there's 3 risks/impacts:
1. Pension going default. Other posts covered this. It would be "backstopped" by pension guarantee board. The "backstop" maxes out quickly - I think like $30K/max per year. But default sounds unlikely.

2. Company acquired. If your pharma company got acquired, the acquirer can modify plan or dissolve it to a defined contribution plan. Then the defined benefit plan gets "cashed out" against some valuation model. I assume this applies to then-current employees and people that left and not yet drawing pension.

3. Inflation. When you leave, the salary used for the defined benefit pension is frozen at the salary when you leave. If you start drawing in 15 years, the purchasing power of your pension is reduced by 45%+, asssuming 3% inflation.

I am late 40's with 25 years also at Megacorp with defined benefit plan.

I estimated that if I left Megacorp for another company, I'd need to make about 20% more just to negate the "freezing" of the old Megacorp pension (because of freezing of salary used in computation and no additional years of service in pension computations).

There's some assumptions in above - like assuming drawing DB pension for 10 years, etc.

I like current job so I'm staying anyhow. And there's risks that the DB plan might disappear/dissolve anhow.

 

[megacorp-firee]

My understanding is that the guvment 'garrrunnteess' our pensions to the tune of $50k. There is some fine print, but I think that is the upper bound.
My pension is also from a conservative McFortuneMegacorp100 company, so I am not worried about them 'defaulting' so to speak.

 

[Gearhead Jim]

I'm a retired United pilot. The last annual report before 9-11 showed our pension to be funded 110%. Now that the PBGC is running the things, I actually get 26% of my pension. Do you notice a slight difference?

The primary purpose of the Pension Benefits Guarantee Corperation is to Guarantee that they will never pay any Pension Benefits.

Seriously, the math is pretty complicated when they take over a pension; and it all works against you. There are some factors in a pilot's pension that shouldn't effect most folks. If you are over age 70 when the plan gets terminated, and didn't have a big pension to begin with, then you'll not be hurt much. If you are younger or have a big pension, bend over.

Fortunately, we also had a huge DC plan that was not effected at all, and our union arranged a big retirement payout for those guys who were still employed in January 2005. That included me, but they totally raped anyone who had retired just a week before.

Equally important for me, was that I saw it coming. On 9-11 I said to my wife "Unless something miraculous happens, United is going to go bankrupt and the pension is in big trouble." So we had 4 years to prepare. Before then we didn't exactly LBYM, but we weren't above it either. Now almost three years into retirement and loving it, flying was fun but United is a sewer.

For decades, I had tried to get information from the union and the company about what would happen to our pensions if United went under, because I considered it to be the most disfunctional organization I had ever experienced. Everyone laughed at me because United was "Too big and too strong to ever fail."

 

[Delawaredave5]

My understanding is that the guvment 'garrrunnteess' our pensions to the tune of $50k. There is some fine print, but I think that is the upper bound.
My pension is also from a conservative McFortuneMegacorp100 company, so I am not worried about them 'defaulting' so to speak.

I think here's current table:
Maximum monthly guarantee tables (PBGC.gov)

It is around $50K if you start drawing at 65.

Our Megacorp has unreduced full pension eligibility at 58 (with at least 27 years service).

The PBGC number at age 58 is around $30K/year.

 

[youbet]

Thanks for posting that DD!

I was aware of the PBGC indirectly through the media. Actually going to their web site and investing a half hour or so reading was very worthwhile.

I'm ER'd but haven't started to collect my MegaCorp DBP yet and there is talk about MegaCorp being acquired, divided and sold and other eventualities. While we wouldn't starve without my pension, I did include it in my FireCalc runs. Running FireCalc without it, my SWR would be survivable but certainly very austere.

I would hope that the fed government would consider funding the PBGC equally important as funding fed gov worker pensions and therefore the PBGC is as secure.

 

[Independent]

I'm a retired United pilot. The last annual report before 9-11 showed our pension to be funded 110%. Now that the PBGC is running the things, I actually get 26% of my pension. Do you notice a slight difference?

The primary purpose of the Pension Benefits Guarantee Corperation is to Guarantee that they will never pay any Pension Benefits.

Seriously, the math is pretty complicated when they take over a pension; and it all works against you. There are some factors in a pilot's pension that shouldn't effect most folks. If you are over age 70 when the plan gets terminated, and didn't have a big pension to begin with, then you'll not be hurt much. If you are younger or have a big pension, bend over.

Fortunately, we also had a huge DC plan that was not effected at all, and our union arranged a big retirement payout for those guys who were still employed in January 2005. That included me, but they totally raped anyone who had retired just a week before.

Equally important for me, was that I saw it coming. On 9-11 I said to my wife "Unless something miraculous happens, United is going to go bankrupt and the pension is in big trouble." So we had 4 years to prepare. Before then we didn't exactly LBYM, but we weren't above it either. Now almost three years into retirement and loving it, flying was fun but United is a sewer.

For decades, I had tried to get information from the union and the company about what would happen to our pensions if United went under, because I considered it to be the most disfunctional organization I had ever experienced. Everyone laughed at me because United was "Too big and too strong to ever fail."

Interesting...
One neat thing about this board is the variety of people who post here.

 

[Delawaredave5]

I'm a retired United pilot. The last annual report before 9-11 showed our pension to be funded 110%. Now that the PBGC is running the things, I actually get 26% of my pension. Do you notice a slight difference?

I heard a story about a bunch of Continental pilots that fabricated sham divorces with their spouses. I guess in divorce settlements, the courts can force the employer to cash out an active DB plan for an employee to settle a divorce.

So several of these pilots got "divorced" and cashed out their DB pensions before the airline went bankrupt and passed pension to PGBC.

Apparently someone at Continental noticed a spike in the "pilot divorce rate", investigated - and now has fired the pilots and I think suing them to repay the distributed pension.

I don't know if this is true or not - might be an urban legend. Interesting strategy, however....

 

[DayDreaming]

Thanks everyone.
Scary stuff,
but thanks.

 

[Arc]

I'm no expert, but i play one on the boards

.

Don't we all !!!

 

[Spanky]

I would hope that the fed government would consider funding the PBGC equally important as funding fed gov worker pensions and therefore the PBGC is as secure.

This is an expensive proposition. As an example, the OPM spent more over $80.3 billions in 2003 for employee benefits to more than 2.4 million retired Federal employees, their survivors and other beneficiaries. The unfunded liability of pension programs can easily cross the $1 trillion mark.
Congressional Budget Justification and Annual Performance Plan -- Executive Summary

It is amazing how the government can fund these programs without incurring more debts, raising taxes or cutting essential services.
Washington Monthly: A pension for trouble; the next S&L crisis

 

[Texas Proud]

Gearhead.... I am surprised that if it was funded at 110% that you would only get 26%... but you know what you are getting.... more than likely it was not 'funded'...

You are right that you can get a lot less if you have a big pension (which I think the pilots had... like steel workers IIRC)... but if you are more in the 'norm', you do not get hit as bad...

The biggest problem is that most companies that are in financial distress are the ones that are not funding their plans... kind of borrowing YOUR pension to try and keep the company running and most of the time losing....

As someone pointed out... I like the cash balance account because that is YOURS... but then again, I do not know if there has been a company that has gone under and not had all the cash needed....

 

[pedorrero]

If some of us more cynical folks are right, the biggest success factor in ER is managing your own money, minding your own pile of acorns, and learning to slap away all those "helping" grasping hands that would like to take their annual fees out of your pile. Beware.

-- Pedorrero, who would be glad to manage your money for 1% of assets per year, and guarantees you a return about 1% below the market average, but lacks the required paperwork

 

[P.S.]

Equally important for me, was that I saw it coming. On 9-11 I said to my wife "Unless something miraculous happens, United is going to go bankrupt and the pension is in big trouble." So we had 4 years to prepare. Before then we didn't exactly LBYM, but we weren't above it either. Now almost three years into retirement and loving it, flying was fun but United is a sewer.

For decades, I had tried to get information from the union and the company about what would happen to our pensions if United went under, because I considered it to be the most disfunctional organization I had ever experienced. Everyone laughed at me because United was "Too big and too strong to ever fail."

personally, the United pension debacle was my huge wake-up call to take retirement into my own hands. fortunately, early in the earnings lifecycle.

 

[Spanky]

You are right that you can get a lot less if you have a big pension (which I think the pilots had... like steel workers IIRC)... but if you are more in the 'norm', you do not get hit as bad...

Lower-paid workers could lose up to 20%. However, high-paid pilots may see their pension cut by 50 to 75% since the maximum coverage from the PBGC for those who retire at 60 is $28,000. Those who were accustomed to a 6-figure pension might had a hard time to adjust.

Court approves termination of United Airlines pension plans
Human Toll of a Pension Default

 

[heyyou]

My pension is from a union so the multi-employer contributions are insulated from employer buyouts and bankruptcies, except when an employer tells the union, "We can close now or keep working with no contributions." The union has such a long history of corruption resulting in oversight, that the pension plan is probably okay by now. The rate of payout is in the 2% to under 3% range so I suspect they get advice from the higher cost provider who somehow gives the nicest gifts to the committee. It is amusing to watch them announce a few tenths of a percent bump in benefits after good markets, then reduce it after bad markets. In mid-2007, they announced a bump up for those who were still contributing.

 

[Caroline]

My last company was acquired by megacorp 7 years ago, so I have only about 40K in my pension.

On the positive side, megacorp just had a great year. On the downside, they've frozen that pension as of December -- just the last in a series of ways they've found to save money at their workers' expense. Didn't affect me much, but some of the old veterans will be missing out on the gains they were expecting.

I don't trust 'em, and I'm taking my little lump sum with me when I go.

 

[Gearhead Jim]

Gearhead.... I am surprised that if it was funded at 110% that you would only get 26%... but you know what you are getting.... more than likely it was not 'funded'...
...
..

There were several factors here, some of which might not impact most other folks:
1. The markets started a huge dive after that last report before 9-11; the report was already about a year old.
2. The pilots pension continued for a couple of years but the company got waivers so they didn't need to make contributions.
3. The PBGC computes your pension using the worst contract/policies within the last 5 years; then looks back 3 years prior to your actual retirement or the date the plan was terminated, whichever is EARLIER. Our plan had big penalties for early retirement, and the PBGC applied them. Even though I retired at mandatory age 60, the 3 year lookback gave me the penalty as if I had retired about age 56. And used my much lower pay at age 56 as the basis for calculations.
4. There were rather low IRS limits on how large an individual pension the company was allowed to fund, so about 1/3 of my pension was not and could not be pre-funded; it had to be paid out of ongoing company funds. Until ch 11...
There are more details but as mentioned in my original post, the math is all designed to make sure you get only a modest pension regardless of how large it was originally supposed to be.

On the bright side, I do the FIRECALC for a 40 year retirement, that would put me at 100 and DW at 98. Probably very conservative, but modern medicine...
Because I ended up with a big pile of cash (DC plan plus negotiated pension termination payout from company), the big losses in my non-COLA DB pension become much less significant over a long period. In my particular case, I lost 74% of my DB pension but only about 20% of my total annual income, based on that 40 year retirement. YMMV.

 

[Alan]

As someone pointed out... I like the cash balance account because that is YOURS... but then again, I do not know if there has been a company that has gone under and not had all the cash needed....

I'd be interested in knowing this also.

However one advantage you have is that if the future looks bleak for your company you can leave and roll over your cash balance to an IRA.