Tuesday, September 16, 2008

Retirees: PBGC and what happens if a pension is terminated (as in a bankruptcy)


Given the financial turmoil of the recent days and the fears among employee and retirees of many companies (especially financial institutions) that their companies could fail or that their defined benefit pension plans could be terminated, it’s a good idea to review the “facts” about this issue.

The main source of information comes form the government itself, the Pension Benefit Guaranty Corporation, or PBGC, with website here.

If you go to the “Workers & Retirees” link and “What PGBC Guarantees” you will see a link at the bottom “see PGBC’s Publication, “Your Guaranteed Pension”. That page answers most of the “big” questions.

The most important question would concern when an employer can terminate a plan. PGBC says there are two circumstances (1) the employer provides enough money to fund the existing retirees with annuities purchased from an insurance company, (2) the employer shows financial distress (the usual cause) and can show a bankruptcy court that it must terminate the plan to stay in business; then the PGBC must take over the plan as a trustee, using the plan assets and PGBC funds. In some cases, the PGBC can initiate a distress termination. Generally, retirees are supposed to be notified at least 60 days in advance of a voluntary termination, but the rules get complicated with distress. Sometimes benefits may be substantially reduced. There are maximum statutory limits of benefits, which at age 65 would be about $4300 a month for an individual at age 65 (PGBC has a complex table giving this information) in 2008.

There are many media reports that PGBC is underfunded and might have to be bailed out by Congress should there be a continuing “domino-like” wave of major corporate failures.

An article in Benefits Link (from Nov. 29, 2007) maintains “Most PBGC Retirees Receive Full Earned Benefit, Study Shows.” About 84% received full benefits, according to the study from the 2006 edition of the Pension Benefit Guaranty Corporation's Pension Insurance Data Book. Of those who had a reduction in benefits. The average reduction was 28%. The link for this story is here.

There is a July 7, 2008 issue of Workforce Management that reports a study led by Barack Obama to investigate reported delays in PBGC resolutions of pension terminations, especially those involving “shutdown benefits”, an example being the Republic Technologies International in Akron, Ohio. PBGC maintains that often books are in poor shape when a company fails. The report (“Senators Seek Probe of PBGC Calculations”) is here.

Another important law is ERISA, the Employee Retirement Income Security Act of 1974, with a Department of Labor link here with discussion of the retiree’s legal rights. ERISA is a “federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.”

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