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Is Your Pension Safe?Is Your Pension Safe? by Andy Barkate The pension system in America is certainly one of the pillars our financial system is built upon. But over the past few years several high profiles pension failures and dozens rumored to be underfunded, are putting this system in jeopardy. Pension plans are promises by your employer to pay a monthly retiring benefit, which is typically based on your years of employment, age and income level. There’s been much written about pension plans being underfunded. Meaning there may not be enough money to pay for current or future retirees. Due to the questionable actuarial assumptions and poor investment performance many public and private companies have become dangerously underfunded, many have shut down their pensions or reduced benefits. Companies like Bethlehem Steel, LTV and more recently US Airways and United Airlines, even names like GM are being whispered. Is your pension plan in trouble? And if it is, what can you do about it? The Pension Benefit Guaranty Corporation (PBGC), a federal agency that insures private pension plans, in 2000 had a 9.7 billion surplus and is now currently running approximately a 9.7 billion deficit. It is estimated that corporate retirement plans are underfunded by over $300 billion. The most recent high profile default is United Airlines which is 8.3 billion short of meeting its obligations. The PBGC, by the way, insures only private pension plans. It does not insure public pension plans (including State and Federal Government plans) or defined contribution plans such as 401(k)s, nor does it insure retiree health care coverage. How do you find out if your employer’s pension plan is in trouble and what do you do if it is in trouble? First of all, don’t panic. While many pension plans are technically underfunded, it doesn’t necessarily mean they can’t or won’t meet future obligations. A plan is considered underfunded if for three consecutive years its assets are less than 90 percent of what is needed to fund current and future obligations. Plans have several years to make up any shortfalls. Companies with strong cash flows are putting extra cash into their plans, and a more positive investment clement may also help shrink the gap. In fact, in the late 1990s, at the peak of the bull market, most pension plans were overfunded. For those corporate plans that do falter, the PBGC will step in to continue payments to retirees. But here’s the catch. The PBGC will keep most retirees whole, but the PBGC caps payments at $43,977 a year, or $3,665 a month, per retiree, so higher paid retirees, and in some cases other employees, likely won’t receive all they were promised by their employer. For example a US Airways retired captain with a $90,000 annual pension will receive a maximum of $43,977, less than half of the promised amount. If you haven’t already read about your employer’s pension woes in the newspaper—airlines, steel companies, auto manufacturers and some state and local pension plans have been among the most publicized—you can take some steps to see how your plan is doing. Check out your plans “ Summary Annual Report”. This states, among other things, how the plan’s investments have fared since the last report (SAR’s generally are issued annually, though smaller plans only have to do it every three years). The real key is the “Minimum Funding Standards” section, which contains an actuary’s statement indicating whether the plan does or does not meet current minimum funding standards. For a more complete picture, request a copy of the plan’s Form 5500. This can be cumbersome, so you may need a little help from your financial or tax advisor to decipher it. What if you find out your employer’s plan is in trouble? If you’re already retired, there’s not much you can do except tighten your financial belt, possibly adjust your personal portfolio and hope for the best. It’s probably the best advice to take out your pension at retirement, in a “lump sum” if your employer offers this option (this also goes for 401k’s and Profit Sharing plans). By doing this, you can invest the money yourself through an IRA Rollover and have more control. You can invest your retirement with mutual funds or annuity companies and have the ability to check out their financial health before committing. Workers with years to go before retirement might want to beef up contributions to a 401(k) or similar plan if offered in addition to the pension plan, or use other vehicles such as an IRA or annuity. Andy Barkate CRPS, CSA is the President of California Financial Network, a local Investment and Retirement Planning firm, with offices in Bakersfield, Lancaster and Ridgecrest.. Your questions and comments are welcome at 661-631-4355, 800-914-6837 or e-mail http://www.abarkate@calfinancial.com. |
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