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Megacorp pension risk assessment ?
Old 01-21-2007, 07:24 AM   #1
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Megacorp pension risk assessment ?

Trying to assess risks around the security of my Megacorp traditional defined benefit pension. Have 20-some years there and 8 roughly to go before ER.

Megacorp may stay solvent for next 30 years and pay pension per plan.

Megacorp might go bankrupt and pass pension to PGBC- I've been to their site and understand the pension reduction impacts.

What if Megacorp gets bought out with private equity, or split up into parts, or merges with anohter public company ?

Are there any websites that cover the pension impact possibilities on these "restructurings" ? Any laws ? If acquiring company has no pension - are there any regulations on valuation of what I have in current plan ?

The pension is non-COLA, but is a big plart of my ER plan. With all these companies "going private", I'm trying to assess "what could happen" - both while I am working and after retirement.

Thanks !

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Re: Megacorp pension risk assessment ?
Old 01-21-2007, 08:50 AM   #2
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Re: Megacorp pension risk assessment ?

Some pensions are annuities that are purchased on the retirement date by the corporation, others are just using an annuity provider to administer the payments that are an ongoing corporate debt. Since we do not hear about defaults on pension debt separate from other corporate debt, I'm guessing that corporate pension obligations are considered as senior as other debt. A buyout has to assume debt to get at other assets. It is in bankruptcy where everything is negotiated on what gets paid off, survives, or gets abandoned.

Your employer's current retiree health care benefits that you are expecting for your retirement, are fully at risk in a buyout. I worked longer to have some cushion to cover pre-Medicare health insurance, just in case former employer reneges on retiree healthcare.

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Re: Megacorp pension risk assessment ?
Old 01-21-2007, 08:54 AM   #3
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Re: Megacorp pension risk assessment ?

Take a look at the PBGC website for a start.
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Re: Megacorp pension risk assessment ?
Old 01-21-2007, 09:00 AM   #4
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Re: Megacorp pension risk assessment ?

Your plan is governed by ERISA. A pretty good summary from the department of labor on your rights with respect to a defined benefit plan:

What happens when a plan is terminated?
Federal law provides some measures to protect employees who participated in plans that are terminated, both defined benefit and defined contribution. When a plan is terminated, the current employees must become 100 percent vested in their accrued benefits. This means you have a right to all the benefits that you have earned at the time of the plan termination, even benefits in which you were not vested and would have lost if you had left the employer. If there is a partial termination of a plan, for example, if your employer closes a particular plant or division that results in the end of employment of a substantial percentage of plan participants, the affected employees must be immediately 100 percent vested to the extent the plan is funded.


What if your terminated defined benefit plan does not have enough money to pay the benefits?
The Federal government, through the Pension Benefit Guaranty Corporation (PBGC), insures most private defined benefit plans. For terminated defined benefit plans with insufficient money to pay all of the benefits, the PBGC will guarantee the payment of your vested pension benefits up to the limits set by law. For further information on plan termination guarantees, contact the Pension Benefit Guaranty Corporation toll free at 1.800.400.7242, or visit the Web site.


What happens if a defined contribution plan is terminated?
The PBGC does not guarantee benefits for defined contribution plans. If you are in a defined contribution plan that is in the process of terminating, the plan fiduciaries and trustees should take actions to maintain the plan until they terminate it and pay out the assets.


Is your accrued benefit protected if your plan merges with another plan?
Your plan rules and investment choices are likely to change if your company merges with another. Your employer may choose to merge your plan with another plan. If your plan is terminated as a result of the merger, the benefits that you have accrued cannot be reduced. You must receive a benefit that is at least equal to the benefit you were entitled to before the merger. In a defined contribution plan, the value of your account may still fluctuate after the merger based on the performance of the investments.

Special rules apply to mergers of multiemployer defined benefit plans, which generally are under the jurisdiction of the PBGC. Contact the PBGC for further information.

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Re: Megacorp pension risk assessment ?
Old 01-21-2007, 04:35 PM   #5
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Re: Megacorp pension risk assessment ?

Martha - thanks a lot !

A couple friends were working with companies having defined benefit plans. They got acquired by a company that had only defined contribution.

In both cases, the acquiring company gave them an amount of money in their 401K as the "valuation" of their accrued value of the years they worked.

Is there any law and/or standard formula for valuing a define benefit pension ?

Both guys were not happy with the amount - they were younger employees - and the valuation of their defined benefit pension was only $10,000 or so.

As I get closer to ER, if this situation were to come up, I guess I'd have the option to immediately retire under old plan.
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Re: Megacorp pension risk assessment ?
Old 01-22-2007, 11:21 AM   #6
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Re: Megacorp pension risk assessment ?

Hi Dave,

There is not one formula for determining benefits, although ERISA does give some guidelines. Benefits are generally determined using a present value computation of the accrued or projected benefits of a retirement plan. This computation is known as the actuarial valuation because it is based on (1) probability (retirement event will take place); (2) demographic changes (increase or decrease in employee's earnings, changes in the mortality tables etc.); (3) interest rate (discount rate used to derive present value of future benefits).

Each plan should have a Summary Plan Description, which tells people how benefits are to be calculated.

In most DB plans, the majority of benefits are earned in the later years of the plan, which is why people who have 5 -15 years until retirement generally get affected the most - they lose the best years of accumulation and don't have enough time to save enough to cover the difference.

Younger people, while getting very little when a pension plan is frozen/terminated, are assumed to be able to save enough in their 401(k)s over 20/30 years to make up the lost pension benefits (although it rarely works out that way).


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