Pension Safety

[imoldernu]

As the makers of Twinkies plans bankruptcy, their pension plan is underfunded by $2Billion.
The current Pension Benefit Guaranty Corporation deficit is $26 Billion.

While I have no dog in this fight, the matter of Pension Safety is a major concern of my sons, and many close friends, a few of whom have seen promised pensions reduced to "maximum" levels as provided by the PBGC.

The overviews provided by different sources (googled stuff)... offer widely different interpretations on the matter of safety.

Thoughts?

 

[imoldernu]

July 12 Consumer Reports for starters:

How Safe Is Your Pension Plan - Consumer Reports

If you’re counting on a traditional defined-benefit pension, there’s reason to worry that you might not get everything you’ve earned. About 80 percent of the 29,000 private-sector defined-benefit plans insured by the federal Pension Benefit Guaranty Corp. have been underfunded by $740 billion. State and local public employee pensions were recently in a $1 trillion hole.

Instead of beefing up plan assets, many companies have cut benefits. Employers can change their pension rules going forward using a variety of tactics, including tinkering with benefit formulas so that your eventual payout will be reduced, “freezing” the plan to stop further accruals, or terminating an underfunded plan.

more

In particular, one of the points:

Earlier this year, American Airlines said it would freeze the plans of most of its 130,000 employees and retirees after threatening to terminate its pension (underfunded by $10 billion) and letting the PBGC take it over. Both options ultimately create a freeze, but a takeover would put into effect payout limits that could shortchange higher-income beneficiaries. For plans ended this year, PBGC maximum monthly benefit are $2,094 for 55-year-old workers and $4,653 for 65-year-olds.

The 55 limit would be a big problem for a pilot friend who was thinking early retirement based on his current plan.

Update on American Airlines Pension Freeze as of Nov. 1 2012
http://www.forbes.com/sites/edwardsiedle/2012/11/14/conflicts-abound-at-american-airlines-pension-and-401k-plans/

 

[Alan]

The 55 limit would be a big problem for a pilot friend who was thinking early retirement based on his current plan.

I faced the same issue when I retired almost 3 years ago at 55.

Just like the issue of "will SS benefits be cut", one must decide on whether to RE or whether to wait one more year.

In our case we took the jump knowing that if we lose all our pension income, and our retiree HI, plus half our SS, and the markets tank then we'd be in deep do-do.

It is what it is, and all one can do is try not to jump ship with a bare bones budget. I no longer worry about the health of our pensions or the PBGC funding.

 

[RetireBy90]

Sometimes I get into the what if cycle. While you need to be prudent, you can also spend too much time trying to cover all possible situations. My take is life is full of stuff happening. We have adjusted and worked through problems all along, and I need to be ready for assumptions to change.

 

[ERD50]

As the makers of Twinkies plans bankruptcy, their pension plan is underfunded by $2Billion.
The current Pension Benefit Guaranty Corporation deficit is $26 Billion.

...

Thoughts?

It's certainly cause for concern. But I don't think (emphasis on 'think') you can compare the $2B and $26B directly.

I think (again), the $26B represents an actual cash balance for the PBGC, while the $2B is needed to fund those future pensions over time. Hmmm, maybe that does mean the $2B is a direct hit against the $26B, accounting wise? I really don't know - it seems like a big hit from one company.

Of course, if there are a lot of high wage earners in that group, they won't get full benefits, so that cuts the liability.

I'm curious what others think.

-ERD50

 

[Texas Proud]

Just because it is underfunded now does not mean it will be after BK is over...

When they sell the assets of the company, they will be used to pay off creditors, including the pension plan...

I would say right now we do not know how big a hole there will be...

Plus, if they have some people with high payouts (have no clue), then that amount would be reduced by the max payout...

SOOO, right now, nobody can say for sure how underfunded it will be....

 

[pb4uski]

As the makers of Twinkies plans bankruptcy, their pension plan is underfunded by $2Billion.
The current Pension Benefit Guaranty Corporation deficit is $26 Billion.

While I have no dog in this fight, the matter of Pension Safety is a major concern of my sons, and many close friends, a few of whom have seen promised pensions reduced to "maximum" levels as provided by the PBGC.

The overviews provided by different sources (googled stuff)... offer widely different interpretations on the matter of safety.

Thoughts?

What didn't make sense was how a company with $1.4 billion of total liabilities according to its bankruptcy filing can have unfunded pension liabilities of $2 billion.

The $2 billion of underfunded is a multi-employer plan that Hostess is only one of many employers.

"Ever since its previous reorganization, Hostess had been paying approximately $100 million annually into a pension fund that covered its employees as well as those of other companies (a multi-employer pension plan, or MEPP, that covers multiple firms in an industry). As of the bankruptcy announcement, the fund was about $2 billion underfunded."

See PrivCo | Hostess Brands, Inc. filed for Chapter 11 bankruptcy protection.

Also from the bankruptcy filing:

Because their workforce is heavily unionized, the Debtors also participate
in 40 multiemployer pension plans, which, by law, exist only where one or more employers each
contribute to a pension plan pursuant to one or more collectively-bargained agreements. The
Debtors' cash contribution obligations to these plans go beyond amounts attributable to the
retirement benefits for the Debtors' own workforce; they also encompass the contributions
attributable to the retirement benefits of the workforces of other employers who have ceased to
exist or have otherwise withdrawn from the plans. By statute, the plans are structured to place
the financial burdens of all of the plan's retirees upon those remaining companies that have active
union employees. Over the last several decades, the number of companies and the active
employee base supporting these pension plans have shrunk significantly, thus increasing the
burden on the companies, such as Hostess, that remain.

 

[Gearhead Jim]

The PBGC "Maximum" isn't really a maximum, it's the maximum guarantee.

The PBGC uses some highly creative formulas to create your "new" benefit; the younger you are and the more money you made, the bigger a hit you will take. But once they have done their "new math", if your new benefit is more than the guarantee then you get the greater of the guarantee or what the money in the (former) company fund will support.

In my case (United pilot, plan terminated shortly before my 60th birthday/mandatory retirement), my re-calculated benefit was about 40% of original, the guarantee was about 20% of original, and I'm getting about 35% of original because there is enough money left in the fund to pay that much.

Of course, that's still about a 65% loss. Fortunately, a side deal between the union and company gave some of us (working at the time of termination) a lump sum that made up for much of the loss.

Low paid retirees in their 70's usually lose very little.
High paid employees in their 50's get totally raped. In theory, they just go out and get another similar job. Yeah, right...

 

[metabasalt]

The PGBC guarantee for multi-employer pension plans is FAR lower than for regular pension plans. There is a maximum for everyone, no matter what your salary or original pension, that maxes out at less than $15k per year.

I know because I'm in such a plan and expect it to eventually be thrown on the PGBC. If they truly are in a multiemployer plan AND that plan goes bankrupt they'll be very sadly surprised.

 

[growing_older]

Some of the reports out of Hostess are describing the company as raiding the previously contributed pension funds and "borrowing" out money that was already contributed, despite being underfunded. This converted some of the actual pension balances to unsecured debt in the future bankruptcy, even through there was no "excess" in the plan to begin with. If true, this seems an especially egregious way to "underfund" a pension plan.

 

[ERD50]

Some of the reports out of Hostess are describing the company as raiding the previously contributed pension funds and "borrowing" out money that was already contributed, despite being underfunded. ...

This would all have to meet PBGC guidelines, right? If the business is on the edge of failing, I would think that pulling the pension down to the minimum, but legal, limits of what the PBGC requires would be something that you would need to do to attempt to survive and protect those jobs.

Maybe PBGC should have stricter guidelines (and IMO they should - 100% funding and assumed returns no higher than inflation), but w/o info to the contrary, this all seems on the up-and-up. Maybe blame PBGC if you are going to blame anyone?

As an aside - the Chicago teachers went on strike recently. And even though there were many issues brought up, I never once heard them push for better funding of their pension plan. Their plan is woefully underfunded, in the 40%'s range IIRC. Why isn't this a major, major issue with the unions? I find that curious indeed.

-ERD50

 

[Chuckanut]

Maybe PBGC should have stricter guidelines (and IMO they should - 100% funding and assumed returns no higher than inflation),

+1

 

[eytonxav]

When I retired from megacorp back in 2003, I took the lump sum option as I didn't trust them nor did I want a lower PBGC payout if megacorp defaulted. In hindsight, I'm glad I took the lump sum as megacorp recently sold off the management pension obligation to Prudential and I understand that with that transaction, the PBGC obligation also went out the window as well.

 

[pb4uski]

FWIW I would prefer to have Prudential Insurance on the hook for my pension than the PBGC.

 

[imoldernu]

Re: Government regulation of plans.

Here's a story that I remember from the early 1980's which could explain the way that companies got so far behind in their required payments.

In 1983, I rode the train into Chicago, with the controller for a corporation that provided school buses for the Chicago School System. He explained what was happening this way:
It was the period following some very high interest rates, during which the company's pension plan portfolio was piling up huge gains, in fact becoming 130% funded... an overpayment of 30% of the requirement. The trustees petitioned the overseers to allow a revised projection that would allow the corporation to take $5 million from the fund and return the monies to the corporation stockholders. This calculation then became the formula for the approved pension plan. as I recall it posited an annual return of something over 10%.
A year or two later when I spoke with the same person, he told me that the plan was already losing major amounts, with no new oversight.

What other reasons could there be for allowing companies to get into this situation? In an attempt to "catch up", are more companies and government entities turning to riskier investments like leveraged derivatives or risky hedge funds?

Does anyone have a handle on the reasons why "guaranteed" doesn't include controls, or why there have been "holidays" for payment into pension funds?

From Wikipedia:

The PBGC is not funded by general tax revenues. Its funds come from four sources:
Insurance premiums paid by sponsors of defined benefit pension plans;
Assets held by the pension plans it takes over;
Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates;[4] and
Investment income.

 

[Chuckanut]

Mr. Imoldernu,
You are another one of those dangerous radicals who thinks and asks to many questions. Just do as you are told and don't worry about what the man behind the curtain is doing.

 

[imoldernu]

Mr. Imoldernu,
You are another one of those dangerous radicals who thinks and asks to many questions. Just do as you are told and don't worry about what the man behind the curtain is doing.

Life is GOOD!!!!!

 

[NW-Bound]

I think it is just human nature to project that good times last forever. I first read of the possibility of pensions being underfunded in the early 2000s, from an article in BusinessWeek. The article sounded an alarm that many pension managers upped their investment return projection based on the stock market rise in the 1980-2000 time frame. Yes, 10%/yr, from here to eternity.

Many businesses made the same rosy projections for business growth, and paid a heavy penalty for plants and tooling investments that sat idle. California, being home to many tech companies, raked in big tax revenues from cap gains paid by high-tech workers, managed to spend all of that, then had big deficits when the tech bubble burst.

I do not think it is any different than when an individual loses his home because he expects it to keep rising in value and cashes out all of his home equity to spend. Businesses and governments are not that much smarter than the average Joe Blow, because they are of the Joe Blows, by the Joe Blows, and for the Joe Blows.

That's my explanation, and I am sticking to it.

 

[youbet]

When I retired from megacorp back in 2003, I took the lump sum option as I didn't trust them nor did I want a lower PBGC payout if megacorp defaulted. In hindsight, I'm glad I took the lump sum as megacorp recently sold off the management pension obligation to Prudential and I understand that with that transaction, the PBGC obligation also went out the window as well.

Had you left your pension with your employer, the security of your annuity would be the same as other annuities with Prudential. Frankly, I wish the Mega I retired from would sell my DBP to Prudential. I think there would be less likelihood of default.

 

[youbet]

Re: Government regulation of plans.

Here's a story that I remember from the early 1980's which could explain the way that companies got so far behind in their required payments.

In 1983, I rode the train into Chicago, with the controller for a corporation that provided school buses for the Chicago School System. He explained what was happening this way:
It was the period following some very high interest rates, during which the company's pension plan portfolio was piling up huge gains, in fact becoming 130% funded... an overpayment of 30% of the requirement. The trustees petitioned the overseers to allow a revised projection that would allow the corporation to take $5 million from the fund and return the monies to the corporation stockholders. This calculation then became the formula for the approved pension plan. as I recall it posited an annual return of something over 10%.
A year or two later when I spoke with the same person, he told me that the plan was already losing major amounts, with no new oversight.

What other reasons could there be for allowing companies to get into this situation? In an attempt to "catch up", are more companies and government entities turning to riskier investments like leveraged derivatives or risky hedge funds?

Does anyone have a handle on the reasons why "guaranteed" doesn't include controls, or why there have been "holidays" for payment into pension funds?

From Wikipedia:

To the best of my knowledge, the Chicago School System does not own a significant number of buses. The vast majority of students either walk to neighborhood schools or take the CTA. What bus manufacturing company are you refering to? Perhaps a small firm which customized vans for physically challenged students or something like that?

 

[check6]

In my case (United pilot, plan terminated shortly before my 60th birthday/mandatory retirement), my re-calculated benefit was about 40% of original,

Jim, was that 40% vs 60% of your final average earnings? I was a UAL "570" but elected to go to NWA in lieu of crossing. My pension was frozen and ended up with a 50% FAE, probably the best of the companies with a DBP. Like they always said, you never know if you made the right decision until you retired...in this case blind luck.

 

[westcoast]

Ellen Schultz's THE RETIREMENT HEIST has many compelling stories of how corporations wiggled out of pension obligations even when their plans were well funded. It's a shocking story.

 

[eytonxav]

Had you left your pension with your employer, the security of your annuity would be the same as other annuities with Prudential. Frankly, I wish the Mega I retired from would sell my DBP to Prudential. I think there would be less likelihood of default.

While that is most likely true, the PBGC (gummit) guarantee went out the window with that transaction. The point here is that nothing is totally secure, even if you take a lump sum which leaves you at the wiles of the market

 

[imoldernu]

To the best of my knowledge, the Chicago School System does not own a significant number of buses. The vast majority of students either walk to neighborhood schools or take the CTA. What bus manufacturing company are you refering to? Perhaps a small firm which customized vans for physically challenged students or something like that?

It was in 1983, and my friend was older than me, so I presume he's not around any longer. In any case, the business was not operated by the Chicago School System... it was a contract service provider. Am not sure I knew the name of the company, even then.

 

[ERD50]

Ellen Schultz's THE RETIREMENT HEIST has many compelling stories of how corporations wiggled out of pension obligations even when their plans were well funded. It's a shocking story.

That book has come up before. It seems to be a case of 'tell the people who hate MegaCorps what they want to hear'.

You can search the forum for the earlier posts, I will not repeat, other than to summarize that from what I was able to take from the reviews/comments, the MegaCorps pulled what the PBGC ruled was 'excess funding' from the plans. All legal, all approved by the PBGC.

If someone needs to be blamed, I'd look at PBGC policy first. As I've said before, I think PBGC should require 100% funding and base growth assumptions on nothing greater than inflation. But I'm not King. If I were, there would be no such thing as pensions - I don't want 'promises', give me the money!

-ERD50