Pension Benefit Guaranty Corporation Max Benefit ?

[Delawaredave5]

Spouse has a defined benefit Megacorp pension. Retiring at 58. Megacorp is "shaky".

If pension got transferred to PBGC and if her benefit got capped at maximums listed below link, is her monthly benefit "set for life" or would it go up as she got older ?

Example: Let's say pension under Megacorp will be $5,000/month. If passed to PGBC when she was 60, look like maximum benefit would be reduced to $3,257.38.

Will it stay at $3257.38 for life ? Or go up each year until hitting original Megacorp amount ? (ie, would her payout go up each year to age 64 getting $4,660.56 ?) Thanks !!!

Maximum Monthly Annuity Guarantees, Pension Benefits

 

[ERD50]

As I understand it, that cap is determined in the year you fall under PBGC control. I do not believe it is ever raised for that person over their retirement. IOW, no COLA for you!

If I read this correctly, it says as much:

PBGC Maximum Insurance Benefit Level for 2015

WASHINGTON — The Pension Benefit Guaranty Corporation announced today that the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan has increased to $60,136 for 2015, up from $59,318 for 2014.

The increase is not retroactive; payments to retirees whose plans terminated before 2015 will not change.

Your corporate pension was not COLA's, correct? I sure wouldn't expect the PBGC takeover to supply a COLA'd pension when they take over. Heck, if that was the case I just might root for old MegaCorp to go down the drain (which might happen anyhow?)! << not really <<

OK, I guess that doesn't really address going from age 60-64, but I'm pretty sure it is the same story. If I take MegaCorp pension at 60, I'm stuck with that level. If I wait until 65, it's higher, but then stays at that level forever.


-ERD50

 

[Dash man]

Once she begins receiving her benefit it is locked in for life. How much the maximum benefit is when she begins receiving the benefit depends on her age and if there is a survivor benefit and the rates for that particular year.


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[ERD50]

From your link:

Your maximum guaranteed amount is based, in part, on your age on the plan termination date (or the date the sponsor entered bankruptcy, if applicable) or, if you were not in pay status on that date, the date you begin receiving benefits from PBGC.

I read that to say the cap that applies at the time is the cap, period. No further increases. But I'm really bad at reading stuff written by the government and/or lawyers.

-ERD50

 

[statsman]

It also sounds like if you aren't taking benefits at the time of the plan termination date (or bankruptcy date), the pension gets capped at the time you start receiving benefits from PBGC.

For instance, if the plan terminates when your wife is 60 but she doesn't start receiving her pension (via PBGC) until she is 62, the age 62 cap is used for whatever the pension would have been at age 62.

 

[Delawaredave5]

Thanks everyone ! Megacorp pension is not COLA.

Does look like it is "capped and fixed" for life if plan gets passed to PGBC, assuming she is already receiving benefits.

 

[Big_Hitter]

For instance, if the plan terminates when your wife is 60 but she doesn't start receiving her pension (via PBGC) until she is 62, the age 62 cap is used for whatever the pension would have been at age 62.

agreed

 

[statsman]

Thanks everyone ! Megacorp pension is not COLA.

Does look like it is "capped and fixed" for life if plan gets passed to PGBC, assuming she is already receiving benefits.

Just remember for someone already taking benefits you use the time of plan termination to determine your wife's age and maximum covered benefit. Taking the pension at age 60 and having the pension plan terminate when she is age 62 means using the age 62 cap on her pension.

 

[Winemaker]

DF 's pension was taken over by PGBC in the 3rd year of his 5 year contact. He retired year 1, receiving agreed upon amount for almost 3 years, and was then cut to 3/5th of the original amount after the bankruptcy/takeover. DF passed in year 4, DM has received the 3/5ths amount for 10 years now.

This reduction, I believe, was to prevent a sweetheart deal to be inked by management/labor contract, that could never be ultimately paid, to be picked up by PGBC. IIRC the amount would have been 4/5ths, had the bankruptcy occur in year 4.

 

[Shanky]

Just because your Mega Corp pension is above the max for a particular age does not mean you will get the max PBGC pension for that age. There are formulas based on how much certain elements of the pension were funded. Example your mega Corp pension may have been 5k per month at age 60, the PBGC max might be 3500 a month and your PBGC actual benefit might be 3200 a month based on funding percentages of the pension at the time of default.


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[Delawaredave5]

So what would you do ? Spouse would take a haircut if passed to PBGC. Megacorp is DuPont - been around forever but now has a corporate raider splitting up company.

Can either take level payments (100%) or get accelerated payments (117%) for 4 years and then 93% for rest of life.

Don't need the extra money now - was planning on straight 100% payments - but precariousness of DB pensions makes me wonder if I should "take the extra money" - especially of PGBC haircut possibility.

 

[harley]

Is there no option for a lump sum payout? Most companies are thrilled to get out from under the pension liability.

 

[Delawaredave5]

No lump sum today. Impossible to predict the solvency of the pension and future changes - I know a lot of companies are offering lump sums and/or outsourcing DB liability to insurance companies paying annuities (Boeing, CSC, JC Penney, etc).

I'd rather not take the increased first 4 year payment scheme. But then I'd regret not taking increased payments if got transferred to PGBC in a few years.

 

[Mulligan]

No lump sum today. Impossible to predict the solvency of the pension and future changes - I know a lot of companies are offering lump sums and/or outsourcing DB liability to insurance companies paying annuities (Boeing, CSC, JC Penney, etc).

I'd rather not take the increased first 4 year payment scheme. But then I'd regret not taking increased payments if got transferred to PGBC in a few years.

You mentioned the company is shaky, but did not mention directly that the pension fund itself is. Have you fully checked into this to see? Do you have access to information that would tell you the funding status of the pension itself?


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[Alan]

You mentioned the company is shaky, but did not mention directly that the pension fund itself is. Have you fully checked into this to see? Do you have access to information that would tell you the funding status of the pension itself?


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+1

My old Megachem was broken up and taken over by various other Megachems in the 90's including DuPont. The last business to be sold included the pension liability so my pension is now owned and funded by this new Megachem who I have never worked for. Each year I get the annual pension statement and it is still well funded so I have few worries. I begin collecting in just over a year.

 

[Delawaredave5]

Funding status is within federal guidelines- like 90%. But I don't know how secure that is. As company breaks up, I'm concerned smaller remaining company won't be able to fund make-up requirements.

 

[ERD50]

Funding status is within federal guidelines- like 90%. But I don't know how secure that is. As company breaks up, I'm concerned smaller remaining company won't be able to fund make-up requirements.

I agree with the previous comments - it is the funding that is important, not so much the strength of the company. That pension fund money is out of their hands.

Personal experience - when my MegaCorp went through splits, buyouts, etc, the PBGC was able to use the approval of that transaction as leverage. PBGC actually required MegaCorp to more fully fund the pension as a condition of approval. IIRC, this was based on the idea that the company going forward with the pension was smaller, so it might be harder for them to make future payments into the fund.

So I wouldn't worry too much about that. And remember, the PBGC only has to fund the difference between that 90% funding and full funding if it takes over. They are motivated to push for fuller funding when they can, and were successful in my case. If you are over the PBGC caps, that is some concern, otherwise, I wouldn't lose any sleep over it. I don't.

-ERD50

 

[Mulligan]

Mine is around 90%. I lose no sleep. It has been that way for some time. Above 80% is considered adequately funded. A pension system can stay under a 100% funded in perpetual manner without any loss of pension income, provided it is adequately managed.


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[Slow But Steady]

I work for a large chemical company that was taken private in an over-leveraged LBO, then went bankrupt as expected in early 2010. Even before the bankruptcy, they had frozen the defined benefit pension.

When the company came out of bankruptcy, they still had control of the defined benefit pension. (It didn't go to the PBGC.) I think that would be the likely outcome of your wife's pension as well.

In my case, though, because of my age and years of service, my pension is small enough that I wouldn't have taken a haircut if PBGC had taken over.

If lump sum is an option, that avoids the PBGC uncertainty, if she goes before a possible bankruptcy occurs. Lump sum is not an option during bankruptcy. Since coming out of bankruptcy, the company I work for has made efforts to keep funding levels up. Thereby allowing people to take lump sums, which are preferred by many.

 

[Dan32]

Pension plan funding rates for the original poster's Megacorp (DuPont) were:

2014 2013 2012
Funding % 91.74 89.43 89.60 (with adjusted interest rates)
Orig Funding % 73.93 75.00 77.07 (based on old calculation)

There are 2 percentages listed for each year. The original calculation used a 2 year average of interest rate (which have been very low). In 2014 the government allowed companies to use a 25 yr average for interest rates (which is higher). This change meant that companies could calculate lower plan liabilities and pay smaller contributions. For the DuPont plan and I assume all Megacorps, the numbers are large. The funding shortfall in 2014 for DuPont with the new calculation was: $1,317,991,026 The minimum required contribution by the company was $211,496,223. With the old calculation the minimum contribution would have been $816,164,843,

As to the original poster, I would take as much of the money from the plan as soon as possible. I say this not based on the plan solvency, but instead on the actuarial neutrality of all the choices and the many unknowns that could shift towards an early payout being beneficial. This is especially true if you can save / invest the increased earlier payouts.

YMMV

 

[Running_Man]

So what would you do ? Spouse would take a haircut if passed to PBGC. Megacorp is DuPont - been around forever but now has a corporate raider splitting up company.

Can either take level payments (100%) or get accelerated payments (117%) for 4 years and then 93% for rest of life.

Don't need the extra money now - was planning on straight 100% payments - but precariousness of DB pensions makes me wonder if I should "take the extra money" - especially of PGBC haircut possibility.

Dupont will be split into 3 companies, Warning flag would be if they loaded up the Agriculture division post split with all of the pension liabilities for all employees already retired. If they go by division then either of the other two divisions will be one of the largest and most successful companies around and in no danger. It is the AG business that is limiting income that had both Dupont and Dow wanting to put this together.

As to the options the Extra 17% on a $5000 monthly pension is $850 a month for 4 years or $40,800 which will then be reduced by $4,200 a year forever over the base pension of $5000. Much would depend on what that extra income would do to your tax rate when taken. If taxes are in the 35-45% range which is not hard to do with state taxes depending on your state then early option is really not providing much benefit. You should look at the tax effect on Social Security as well, if you are already passed the taxability of SS benefits then level income could be the best choice, unless the benefits are in the AG division.

 

[Gearhead Jim]

Things may have changed, but when my pension was turned over to the PBGC in 2005 they used some very creative math to reduce the amount of money you get.


From memory:


They use the worst retirement "contract" you had within the last 5 years, not the one in effect when the plans is terminated.


They presume you retired two years prior to the plan termination, and they say normal retirement age is 65. So if you had just retired at 60, they will combine those two penalties to create a penalty of 7 years early on your retirement "date". Many retirement plans have a penalty of 6%/year for early retirement, so just that portion would reduce your benefits by 42%.


The calculations are very complex, and it's almost impossible to calculate your "new" pension until after the fact. In my case, they came up with an estimate within a few months, then re-calculated after a couple of years, and then another re-calculation a couple of years after that.

 

[ERD50]

Things may have changed, but when my pension was turned over to the PBGC in 2005 they used some very creative math to reduce the amount of money you get.
...

Yes, but your situation was likely far from typical. As I recall from previous discussions, you were a pilot. From what I understand, the normal pensions were a pretty high $ amount (and I'm not saying they weren't earned/deserved, I'm just talking numbers here), and some rules that forced retirement at 60 (I think?) play into the formulas. So this complicated things, and from what I recall, the pilots really did take a big haircut from the move to PBGC.

But someone with a more modest pension, and no special rules will probably be OK. At least from what I understand.

-ERD50

 

[Big_Hitter]

Pilots have a NRD of 60 so yes, PBGC haircuts can be more severe