By MARY WILLIAMS WALSH
Published: January 30, 2005
http://www.nytimes.com/2005/01/30/business/yourmoney/30pens.html?th
Until recently, a pension seemed like a sure thing. If you worked
long enough, you could count on a predetermined stream of income
upon retirement, backed by the federal government.
Now, however, a series of pension failures at companies like United
Airlines, US Airways, Bethlehem Steel, Kaiser Aluminum and Polaroid
has cast doubt over such certainties. While the government insures
pensions, the coverage is limited – and it is much more varied than
the government’s insurance for bank deposits. In the last two years,
tens of thousands of pilots, steelworkers, managers, mechanics and
others have discovered that the pensions they earned were richer
than the government’s insurance – something that they did not know
until their pension plans had failed.
Their misfortunes raise important questions for the millions of
workers and retirees who participate in company pension plans: Who
stands to lose when a plan fails? How big are losses likely to be?
And, just as important: If you find that you are not fully insured,
what can you do?
The answers ought to be readily available, given the stakes. But
finding out whether your pension – or the pension of a spouse,
sibling or parent – is fully insured can be a complex process.
For bank accounts, the Federal Deposit Insurance Corporation has a
straightforward limit of $100,000. Depositors who have more than
that can protect their funds by simply dividing their money between
several institutions or account categories. But the federal Pension
Benefit Guaranty Corporation’s coverage depends on a person’s age,
the type of benefits promised and other factors generally beyond the
control of a typical employee. The wide variations are mainly a
result of efforts by Congress to make the system fair and to keep
companies from ringing up big pension obligations and then dumping
them on the government.
A basic rule of thumb is that the government covers benefits of up
to about $45,000 a year for people who retire at 65; this maximum
rises each year with inflation.
But the guideline can be misleading: it is a little like saying that
your homeowner’s policy pays a maximum of $450,000 before you know
if it covers floods, fires, theft or other losses, or if possessions
like antiques are handled in some other way.
In reality, few people caught in a pension collapse happen to be 65
when their plan fails. For those who are younger, the maximum
coverage is lower. For a 45-year-old whose plan fails this year, for
example, the government covers a maximum of $11,403 a year, even if
he has earned a larger pension. But for a 75-year-old, the
government covers benefits of up to $138,665 a year. A list of the
figures can be found at the Web site of the pension agency,
www.pbgc.gov/news/press_releases/2004 /pr05_14.htm#chart.
Even these ceilings may be raised in some cases, thanks to a
provision that shifts the remaining assets of a dying pension plan
toward the oldest participants. Congress designed the insurance that
way on the assumption that the oldest people would be least able to
re-enter the work force and start building a new nest egg.
At US Airways, for example, hundreds of older pilots qualified for
this special provision. They now receive, on average, $20,400 a year
more than their “maximums.”
On the other hand, some people do not get what the maximums seem to
promise. The government covers only basic pension benefits, not
certain supplements tacked on by employers. That coverage gap can be
large.
How can you learn where your pension stands? The first step is to
assess your company’s financial health. A healthy business cannot
just hand its pension obligations to the government and walk away.
The company must be in bankruptcy to default on pension payments,
and even then it must convince a federal bankruptcy judge that such
a step is necessary.
Companies that issue bonds have credit ratings that can be checked
at the public library or at
www.nasdbondinfo.com
a Web site
operated by the National Association of Securities Dealers. The
rating does not directly assess the reliability of a company’s
pension plan, but it does provide an outside analyst’s opinion of
the company’s ability to make good on its debts; the lower the
rating, the greater the chance the company will not meet its
obligations.
If the company’s finances show signs of weakness, it makes sense to
try to determine the strength of the pension fund. But that will
probably mean a lot of paper chasing. Pension documents can be
cryptic, and the ones that offer employees the most useful picture
of the pension fund – annual plan reports filed with the Labor
Department – are often at least two years old. The section called
Schedule B: Actuarial Information is most relevant.
These reports may be obtained from the administrator of your
company’s pension plan, or from the Office of Public Disclosure at
the Labor Department, at (202) 693-8673. If you are not sure who
administers your plan, your company’s human resources department
should be able to tell you.
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The plan administrator should already be sending you a synopsis of
the pension plan each year, in a document called a summary annual
report. It contains a small part of the full filing to the Labor
Department, but it is likely to be more up to date. The law also
requires the administrator, upon request, to give all covered
employees two additional documents: an individual benefit statement
and a summary plan document, which explains the terms of the
benefits.
Armed with these documents, you can calculate the benefit you have
earned and whether it would exceed the federal insurance limits if
the plan defaulted.
The benefit formula should be stated in the summary plan document;
to calculate yours, plug in your current salary and years of
service. Pension actuaries also forecast future benefits, such as
the amount you can expect at the age of 65. The individual benefit
statement will probably contain one or more such forecasts. But if
you are worried about your plan’s future, these forecasts are
probably less important than the benefit you have earned so far. For
a 45-year-old whose pension plan is unlikely to be around in 20
years, the age-65 benefit may not be relevant.
Suppose you are 65 and have earned a pension of $65,000 a year. It
appears that $20,000 of it is at risk, because it exceeds the
government’s basic insurance cutoff. But you may qualify for one of
the government’s “preference categories,” which could result in a
higher level of coverage. The category that comes into play most
often is for people who have already reached their plan’s retirement
age when the plan defaults, whether or not they have actually
retired.
Being in the retirement-age category helped some US Airways pilots
greatly. But that is not the case at every company. How much extra
pension coverage you get, if any, depends on two factors beyond your
control: the ages of all the people in your pension plan and how
much money happens to be in the fund on the day it fails.
The amounts in defunct plans can vary significantly. When the US
Airways plan failed, the pension insurance agency found that the
plan had about 33 cents for every dollar promised to the pilots. The
plan at Bethlehem Steel was somewhat stronger, with 45 cents for
every dollar owed. The plan for salaried workers at Kaiser Aluminum
was all the way down to 21 cents for each promised dollar.
Congress wanted a fund’s remaining money to go first to workers who
had reached retirement age. If your company has a relatively young
work force, whatever extra money is available will be shared by a
small group of retirement-age workers, and each of them will get
more, up to their earned benefit. That was the case at US Airways,
where only 864 pilots were of retirement age, out of more than 6,000
pilots in the pension plan.
The retirement-age group at Bethlehem Steel was not so lucky. Their
plan was more sound, but because the work force was older, with
retirees outnumbering active workers by more than three to one, the
leftover money had to be divided among thousands of people.
For about 8,500 Bethlehem Steel retirees, there was another piece of
bad news: the company sweetened their benefits shortly before the
plan terminated, by promising supplementary features that the
government did not cover. These retirees’ average pension payment
was about $2,000 a month just before the plan was taken over by the
government at the end of 2002. Their average benefit was reduced to
about $1,500 a month.
After a pension fund fails, workers and retirees can do little to
protect themselves. But if it is still alive and going downhill,
some steps can be taken. A union, for example, can try to negotiate
a larger company contribution to the pension fund in lieu of a big
pay increase. And if you think you have already earned a larger
pension than the government insurance would cover, you may even want
to consider changing jobs – provided, of course, that the new
employer is taking good care of its own plan.
Informed workers “will either move on or they’ll pressure their
employer to more adequately fund the underfunded pension plans,”
Labor Secretary Elaine L. Chao said in a recent speech in which she
called for more pension disclosure. Ms. Chao is also the chairman of
the Pension Benefit Guaranty Corporation.
In any case, if you can’t count on your pension, you may really want
to take matters into your own hands – by starting to save more of
your paycheck.