Is a company's pension fund "separate" from company ?

[Delawaredave5]

A friend of mine is a retiree of Megacorp - which has a traditional defined benefit pension.

Megacorp is rumored to be split up by an active investor.

Is his pension secure and separate from the company ? If the company gets split up, is the pension at risk ?

I've heard the phrase "pension raiding" but I don't know what that means.

I think it means if a pension is over-funded, a person who acquires the company can raid the pension of the overage, right ?

But no one can touch up to the "fully funded" amount, right ?

Appreciate any insight.

 

[youbet]

A friend of mine is a retiree of Megacorp - which has a traditional defined benefit pension.

Megacorp is rumored to be split up by an active investor.

Is his pension secure and separate from the company ?

His pension is insured with a limit. It is NOT separate from the company and if the company goes bankrupt, he'll be relying on the insurance.

If the company gets split up, is the pension at risk ?

The fate of the pension fund is one of the things that will be spelled out in the separation terms.

I've heard the phrase "pension raiding" but I don't know what that means.

I think it means if a pension is over-funded, a person who acquires the company can raid the pension of the overage, right ?

But no one can touch up to the "fully funded" amount, right ?

Appreciate any insight.

I can't comment on "pension raiding" other than to say that companies don't want to have any more in the fund than legally required and will petition to change the rules or work the rules in their favor. Most funds are not "fully funded" and are not required to be.

The company sends out information, required by law, every year to all participants. The funding status and other information is included. If your friend is not studying this and getting any possible questions answered, he should be whipped long and hard.

 

[aja8888]

A friend of mine is a retiree of Megacorp - which has a traditional defined benefit pension.

Megacorp is rumored to be split up by an active investor.

Is his pension secure and separate from the company ? If the company gets split up, is the pension at risk ?

I've heard the phrase "pension raiding" but I don't know what that means.

I think it means if a pension is over-funded, a person who acquires the company can raid the pension of the overage, right ?

But no one can touch up to the "fully funded" amount, right ?

Appreciate any insight.

I think the first thing your friend needs to do is visit with Megacorp's HR and get a copy of the pension benefit prospectus and read it.

 

[pb4uski]

A pension fund is separate from the sponsor company and the pension fund assets are held in trust. It is possible for a company to go bankrupt but for the pension to survive assuming the pension is adequately funded.

If the pension funds assets are insufficient to pay benefits and the company/sponsor is unable or unwilling to provide additional funding then the PBGC would step into the void.

As I understand raiding it could only be done with an overfunded plan. There are all sorts of complex ERISA rules that constrain a sponsor company's ability to extract assets from the plan, but they can do it in a backwards way by offering an enhanced pension benefit to incentivize employees to retire and avoid the cost of severance.

The pension plan has separate financial statements and a separate audit. The net pension liability (accrued liability in excess of pension assets) or asset would be reflected in the sponsor's financial statements with all sorts of gory details provided in the footnotes to the financial statements.

 

[Bikerdude]

My pension (and everyone hired after a certain date) is covered by an Annuity. If the Annuity company goes under I would have to rely on my State guaranty fund.

 

[gauss]

Delawaredave5,

If your friend's pension plan is covered by the Federal ERISA law, then some of the payments are "guaranteed" by the PBGC under current law. You can get further details at pbgc.gov. One thing to note is that the PBGC only guarantees pension payments up to a certain annual dollar amount ($54,000 in 2011). This amount is reduced by about 7% per year if your friend starts drawing the pension at an earlier age (before 65). You can find the charts for this at pbgc.gov. Early retirement Social Security supplements that are temporary, (ie end when you turn 62), are not fully insured.

I always keep track of my accrued pension benefits and how much of it is insured by the PBGC. An overview is available at Basic Benefits Guaranteed by the Pension Benefit Guaranty Corp

-gauss

 

[Running_Man]

A friend of mine is a retiree of Megacorp - which has a traditional defined benefit pension.

Megacorp is rumored to be split up by an active investor.

Is his pension secure and separate from the company ? If the company gets split up, is the pension at risk ?

I've heard the phrase "pension raiding" but I don't know what that means.

I think it means if a pension is over-funded, a person who acquires the company can raid the pension of the overage, right ?

But no one can touch up to the "fully funded" amount, right ?

Appreciate any insight.

Normally in cases like this, if a pension fund is fully funded the company doing the break up will "freeze" the pension. That is the company will no long allow any benefits and the benefits at that point can be calculated for their employees.

For the company this frequently results in a drastic reduction of the pension liability as the liability calculated assumed a number of employees would earn future raises that would give a larger pension than would be calculated only on what is earned so far. The plan can be terminated and cash offered or if fully funded at that point can be transferred to an insurance company and be taken off of the books. The excess is then returned to the company. Normally the pension in this case is safe because the pension must be fully funded to do this.

 

[Chuckanut]

I've heard the phrase "pension raiding" but I don't know what that means.

Read the book Retirement Heist. Even though this may have not been the author's intent it makes a good case for allowing employees to immediatly vest in their retirement funds and have complete, 100% ownership and control of their retirement assets.

 

[Gearhead Jim]

If a pension plan is terminated by bankruptcy, the PBGC takes it over and recalculates everyone's pension. The math used by the PBGC seems far different from normal accounting, and even a fully funded plan will often see significant reductions in monthly payouts. As we said when our plan got terminated: "The mission of the Pension Benefit Guarantee Corporation, is to Guarantee that they never pay any Pension Benefits to anyone."

As gauss said, the level of payments covered by the PBGC "insurance" is pretty low.

 

[ERD50]

If a pension plan is terminated by bankruptcy, the PBGC takes it over and recalculates everyone's pension. ....

As gauss said, the level of payments covered by the PBGC "insurance" is pretty low.

As I understand it, 'pretty low' is not really an issue for most retirees. From the PBGC site, the guarantee, based on pension at 65 YO is $57,477.24.

Basic Benefits Guaranteed by the Pension Benefit Guaranty Corp

Now, I recall that Gearhead Jim is a UAL pilot. This is a rather special case, with higher than average pensions, and a factor for the forced 'early retirement' of pilots at 60(?). So those, as I understand, saw significant cuts under the 'guarantee'. But for the vast majority, who would take a <$57,477 pension at 65, it would be fully covered (again, as I understand it).

-ERD50

 

[Gearhead Jim]

You are correct about my situation, but many of the reductions that were applied to my pension could also happen to others.

The rules and the math to use them are complicated, and very ugly.