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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 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.

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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.

See also: Options when the government takes over your pension


Jenny C. McCune is a contributing editor based in Montana.
-- Updated: Feb. 9, 2005
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See Also
Plus: Options under PBGC administration
How healthy is your company's pension plan?
Finding missing pension benefits
Investing glossary
More investing stories

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