What happens to your pension when your company has financial problems?
 

It's bad enough working for a financially troubled company, but if you're a retiree or about to become one, you have an added concern: the fate of your retirement benefits. Depending on how your company's been handling its finances and what type of retirement plan you have, you could end up with a lot less than you counted on.

Participants in 401(k) plans normally don't have much to worry about -- unless the company shells out stock instead of cash for its contribution.
Remember Enron? Its match to workers' 401(k)s was company stock; employees watched the value of their retirement accounts plummet with the stock's price in the wake of alleged misdeeds by the energy company's executives.

Making matters worse, the workers couldn't do anything to protect their pension positions: Enron froze their 401(k) plans, preventing them from selling the company stock that had accumulated. Such blackout periods, during which plan participants aren't allowed to make account changes, aren't illegal, but in the wake of several corporate scandals, a new federal rule was instituted to give employees more notice of upcoming account-hold actions.

Even if your employer goes under or the plan's third-party administrator files for bankruptcy, your 401(k) funds are still there. But, like the Enron workers, you could see your account's value drastically reduced.

Old-fashioned pensions can be a bigger problem
It's another story, however, if you have an old-fashioned company pension. Also known as a defined benefit plan, the company alone contributes to the account and you're paid a specific monthly benefit at retirement.

"In most situations, the plan does get terminated as part of the bankruptcy reorganization," says Tammy Shelton, principal at Mellon's Human Resources & Investor Solutions in Dallas, Texas.

This was the case when United Airlines announced that in order to survive bankruptcy it planned to end its four employee pension plans. Terminating them, according to the airline, would save the company $4.1 billion over five years.

There are two ways an employer can discontinue a pension plan: a standard or a distress termination.

In a standard termination, the plan has enough money to honor its obligations to retirees. So if you're vested in your company's pension, you'll receive your promised benefits from what you're owed at that point. The company, however, will not contribute any further to your pension. And employees who aren't vested in the pension plan are out of luck.

Under a distress termination, the employer must show it is under severe financial distress and that continuing to fund the pension plan would deal a fatal blow to the business. In this case, administration of the plan is taken over by the federal Pension Benefits Guaranty Corporation.

Beyond distress or standard terminations initiated by the employer, plans also can be shut down by the PBGC if the agency determines that is the only way to protect plan participants.

Such terminations are rare, but they do happen. For example, if a corporate pension plan can't meet its current obligations and is unable to pay the monthly sums owed each retiree, then the PBGC could step in.

Federal pension guarantees
In essence, the PBGC insures pensions much the way the Federal Deposit Insurance Corporation insures your bank account. Currently the PBGC says it pays retirement benefits to 459,000 retirees in the 3,287 pension plans it administers.

A company pays PBGC yearly insurance premiums, set by Congress -- currently $19 per worker. The PBGC invests the premiums in stocks and bonds, much as you would for your own 401(k), or as a company would invest for its corporate pension plan. But your plan is insured by PBGC even if your employer fails to pay the premiums.

The PBGC guarantees "basic" benefits earned before a plan ends. These include:

Pension benefits at normal retirement age (65),
Most early retirement benefits,
Disability benefits for disabilities that occurred before the plan was terminated, and
Certain benefits for survivors of plan participants.
The pension benefits a retiree receives from the PBGC also depend on the provisions of the individual employer's plan, the legal limits, the form of benefit, the retiree's age and the amounts the PBGC recovers from employers for plan underfunding. The agency does not guarantee health care, vacation pay or severance pay.

The bottom line for your retirement money: Even if your company runs into financial trouble, you'll still have your pension. The bad news is that the amount you receive may be less than you expected. That's because Congress sets a ceiling on PBGC-administered pensions.

For 2004, the pension cap is $3,698.86 a month or $44,386.32 a year. And remember, that's the maximum you can receive. If your pension was less or you retire before age 65, the amount you'll receive will be less than the PBGC ceiling. As an example, the PBGC says if you retire at age 55, your benefit would be reduced to $1,664.49 a month or $19,973.88 a year.

For pension participants who were to receive a pension of $45,000 or less annually, having PBGC step in isn't a big deal. But if your pension was more than the maximum dispensed by the PBGC, you could be out a lot of money.

An airline pilot, for example, expected to receive an annual pension of between $50,000 to $75,000. But since his employer terminated its plan, that pilot is eligible only for the PBGC maximum, cutting his post-work income substantially.

Looming pension crisis
So should you worry, more than you generally do, about your retirement plan? Maybe.

Currently, there is a pension crisis of sorts and not just because financially-troubled companies are bailing out of their obligations. Many pension funds are underfunded, even those operated by solvent companies. The PBGC reports that at the end of 2001, 261 companies had $111 billion less in their pension plans than they have promised in future benefits. Wilshire Associates Inc. estimates that 81 percent of corporate benefit plans are underfunded.

Part of the problem is the federal tax code. Tax rules discourage companies from socking money away for a rainy retirement day, says Jim Morris, senior vice president, retirement solutions, at SEI Investments in Oaks, Pa.

"There's a limit to how much they can contribute to a plan in a year. There's a cap on it," he says.

Couple that contribution limit with a sluggish stock market, and pension plans assets have shrunk to the point where many are struggling.

Pension plans are required by law to tell pensioners if they are underfunded. The notification triggers are (1) the pension has been 80-percent funded for the past year or two, or (2) it has been less than 90-percent funded for several years. If either of those red flags go up, a plan administrator is required to give participants an annual written notice.

However, as a pensioner there's not much you can do if you receive such a notice. Your options are to wait (and hope) for things to improve or watch as your pension plan is terminated.

If your employer decides to end the plan, the plan administrator must notify all retirees and future retirees. The Notice of Intent to Terminate must be delivered to pensioners at least 60 days in advance of termination.

In a standard termination, you receive a second letter describing the benefits you will receive, generally no later than six months after the date proposed to close the plan.

Under a distress termination or a termination initiated by the PBGC, the PBGC as trustee of the plan will provide plan participants with information about the pension insurance program and the agency's guarantees.

Want to be kept informed regardless of how healthy your plan appears? Legally you can obtain information about your plan's funding by submitting a written request for this information to your plan's administrator.