Pension tension: What to expect if your retirement
plan is terminated -- Page 2
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
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
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
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
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.
See also: Options
when the government takes over your pension