Decision on Pension

[SoReady]

Hi all.

I received notice from my old company that there are changes coming to my pension. Nothing stays the same I guess.

I am 58 and figured on taking pension sometime between 62 (~42k/yr) and 65 (~$52k/yr). I'm currently retired and have after tax funds to last to that age range.

The pension changes being communicated is the company is giving the pension responsibilities to Prudential Insurance. I have 3 choices:

1. Take a lump sum. I expect more details to come on this regarding how much that might be. But if I take this I need then to determine how to invest correctly e.g. annuity, balanced fund, CD's, combination of all, etc.

2. Begin taking the distribution now. I think this option is for those that may not be eligible for pension distribution yet. I am so it doesn't pertain to me.

3. Leave everything as is and let Prudential pay out when I want, sometime between 62 and 65. Where I have some hesitancy is that when the company has the pension it is guaranteed by PBGC. At prudential it is not.

In my plan the amount coming from pension (and SS) is my floor which covers most of my basic expenses. My other investments then cover discretionary investments. So I would like to continue having a safe vehicle that can cover the non-discretionary expenses.

For now (until I get more specific information regarding this change) what are peoples thoughts on Prudential having the pension and not being guaranteed by PBGC? Would I have much to worry about with just going with option #3?

Thanks,

Bob

 

[greydog17]

With Prudential you s/b ok. They're solid.

 

[robertf57]

I think your reasoning is sound regarding the guaranteed floor through social security and pension (although if you have 5 million in investable assets, perhaps not). I personally am not to concerned about prudential; but I would want to see what the buyout offer actually is before making a decision.

 

[SoReady]

Thanks. I agree about getting the specifics first. They are supposed to be mailing that out today. I'm sure I'll be back here asking more questions if I become indecisive after that.

Bob

 

[pb4uski]

With Prudential you s/b ok. They're solid.

+1 I would rather have Prudential backing my pension than the PBGC.

 

[ERD50]

+1 I would rather have Prudential backing my pension than the PBGC.

I'm not disagreeing, but why do you say this?

-ERD50

 

[pb4uski]

A few reasons.

First, I'm very familiar with the industry given a 25 year career and the steps the industry took after the Executive Life debacle to better define what capital companies need to back the products they issue and how regulators monitor solvency post Executive Life. There has not been a major insolvency since risk based capital was put in place in the 1990s and the industry did quite well in the 2008 great recession - many companies were stressed but they made it through, unlike banks that were going belly up every other day. (and please don't mention AIG.. because its insurance companies weathered the economic storm very well... the AIG troubles were caused by some idiots at headquarters who thought they were the smartest guys in the room and weren't and killed the company as a result...)

Second, I'm quite familiar with Pru from when I worked in industry and then later they were a client and I think they are a pretty strong operation... not the best but better than most.

Third, I don't have much confidence in the PBGC. Its liabilities have exceeded its assets habitually and it has had losses in 5 of the last 10 years. I have little confidence that Congress would bail them out if needed given the situation in DC.

 

[Katsmeow]

When DH retired he elected to take his pension as a lump sum. We felt more comfortable with that than relying on PBSC. We rolled over the lump sum into an IRA at Vanguard and we've been happy with that.

 

[ERD50]

A few reasons. ...

OK, thanks. I appreciate the insights.

-ERD50

 

[clifp]

That makes sense pb4uski.

I do have a fear that we will have an insurance crisis, possibly in my lifetime. But comparatively it seems likely that PBGC would be in worse shape.

 

[Delawaredave5]

I'd guess PBGC is "more guaranteed" than Prudential, but you probably can't beat Prudential for private company backing. The PBGC has annual maximums - you might have maxed out under PBGC and not under Prudential.

I wish I understood what governs companies around pension changes. What if Megacorp got a great deal from a lousy rated insurance company - can Megacorp just push the pension there and saddle retirees with extra risk ?

If you choose the Prudential option, I'm assuming the payment amount is more secure - Prudential cannot change that (unless there's world insurance meltdown).

If pension stayed with Megacorp and became underfunded (but still solvent and not requiring PBGC guarantee), can Megacorp reduce defined benefits to "stay afloat" ?

I also don't understand relationship between Megacorp and "Megacorp Pension Fund" - if Megacorp goes bankrupt, restructured, etc - how would that affect pension fund ?

Sorry I'm asking more questions than answering - but my point is the Prudential might increase the certainty of your defined benefit pension payout.

A lot will depend on the lump sum offer.

 

[Chuckanut]

I wish I understood what governs companies around pension changes. What if Megacorp got a great deal from a lousy rated insurance company - can Megacorp just push the pension there and saddle retirees with extra risk ?

Read the book "Retirement Heist" by Schultz. It's gives a sad picture about how and why companies changed pension plans.

My advice to any young person: Get the money not the promise, and invest it in an account controlled by you, not by any company, and not by government. Make your retirement 100% your asset.

I'm lucky. My state has managed its pension system well, not perfectly, but well. And, I have also been in SS for my entire career. Pity those who are in a mismanaged pension system. Worse, are those in a mismanaged system and not part of SS.

 

[pb4uski]

I'd guess PBGC is "more guaranteed" than Prudential....

Prudential Insurance Company of America (Pru's lead/flagship insurer) had $297 billion of assets and $287 billion of liabilities and $9 billion of surplus at December 31, 2013 under regulatory accounting which is quite conservative. On the other hand, the PBGC had $85 billion of assets, $121 billion of liabilities and a $36 billion deficit as of September 30, 2013. Thank you very much, but I would prefer Pru to the PBGC.

From PBGC annual report:

PBGC is funded by assets from trusteed plans and premiums from plan sponsors, not by taxpayer dollars.

...I also don't understand relationship between Megacorp and "Megacorp Pension Fund" - if Megacorp goes bankrupt, restructured, etc - how would that affect pension fund ?

The pension fund and Megacorp are separate legal entities. There are rules on what Megacorp must contribute to the plan (but they can voluntarily contribute more if they wish). There are also restrictions on what the fund can invest in and how the money must be used. If Mega goes bankrupt it would affect the fund in that there would no longer be any contributions from Mega to support the fund. As I understand it, while in theory a troubled Mega shouldn't be able to access the pension fund's resources they could utilize them in backwards ways through various loopholes that exist.

PICA 2013 Statutory Financial Statement

PBGC 2013 Annual Report

 

[meierlde]

Also there are state guarantee funds for annunities as well. They do have limits however, you might check on your states limits there also. Although I agree that Prudential is pretty secure.