retirement

Can you count on your pension to be there?

Highlights
  • Falling interest rates adversely impacted the funded status of corporate plans.
  • The PBGC backs private pensions, up to a maximum of $54,000 per year in 2011.
  • Most states have taken action to make their public pensions fiscally sound.

How's your pension these days? Are you worried about its health? If so, you're not the only one.

Private and public pensions are on shaky ground, even though both are guaranteed -- the former by their sponsoring corporations, with the Pension Benefit Guaranty Corporation, or PBGC, as a backup. Public or government pensions are effectively guaranteed by taxpayers.

The funded status of pension plans can change erratically, even over short periods of time. For example, pension plans sponsored by Standard & Poor's Composite 1500 companies lost $191 billion in the first six trading days of August 2011 alone, according to Mercer, a global benefits consulting firm. Their funded ratio fell from 83 percent at the end of July to 73 percent by market close on Aug. 8. Then it rebounded to 79 percent by the end of August. That's down from a peak of 88 percent, measured at the end of April.

These pension plans were hit by increasing liabilities and falling assets, with the most significant impact coming from a rally in long corporate bonds, says Peter Austin, executive director of BNY Mellon Pension Services.

"Falling interest rates had a severe impact on the funded status of the typical corporate plan," Austin says. "As a result of the rate decline, corporate plans gave up all of the gains they had achieved in 2011."

So should you be really worried? The answer is almost certainly yes -- and no.

Precious few pensions

First of all, if you have an old-fashioned defined benefit pension, consider yourself lucky. Only about 20 percent of workers do, according to the U.S. Department of Labor.

You can take comfort in the Pension Protection Act of 2006, which requires companies that have underfunded pension plans to pay higher premiums to the PBGC. The PBGC also forces companies that terminate their pension plans to put more money in the plans. And it requires companies to analyze their pension plans' obligations more accurately, closing loopholes that previously allowed some companies to skip payments when times were tough.

"I think the Pension Protection Act really does provide a very sound framework for the management of plans and results in overall better health of the U.S. corporate pension market," says Austin. "It's a pretty darn good law that has gotten the attention of every plan sponsor."

Lump-sum provisions

The new rules also make it more attractive for companies to offer employees a lump sum, Austin says. Lump sums require a lot of upfront cash. Under older rules, an employer that chose to offer a lump sum had to stick with the decision. Under the new rule, firms can offer a window of lump-sum opportunity -- and then close it.

Historically, Austin says, half of all employees will choose the lump sum and half will stick with an annuity, which removes some pressure from the corporation's assets.

If you decide in favor of the company annuity plan, the PBGC offers you a guarantee that the money will be there as long as you are around to draw upon it. For 2011, the maximum benefit for those retiring at age 65 is $54,000 per year. You can count on being made whole even if the company you worked for goes belly up.

What about public pensions?

Last year the Pew Center on the States stated there was a $1 trillion gap at the end of 2008 between the amount states set aside to pay for their workers' retirement benefits and its actual price tag. Other organizations said the Pew estimate was conservative, and that the gap was much wider. Still others say it's not as bad as it seems.

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