Will your company's traditional pension plan be there when you retire, and what can you do now to prepare for the possibility that it might not be there?
The last few years have seen the implosion of several major corporate pension plans, particularly in the airline and steel industries. Hundreds of other companies have reported to the federal government that if their pension plan ended today, they wouldn't have enough money to pay their future obligations.
But there are steps you can take to assess the solvency of your company's pension plan and to put a contingency plan in place in the event the pension plan runs into trouble.
First, try to get as accurate a picture as possible of the true health of your employer's pension plan. Unfortunately, this isn't easy. Companies must disclose in their annual report the funding ratio for the "current liability" of their pension plan-how well they're able to meet current retiree payments. But they don't have to report how well they're funded in the event the plan is frozen or terminated.
For example, according to the Pension Benefit Guaranty Corporation, the federal agency that backs most defined-benefit pension plans, the pension plan for U.S. Airways' pilots had reported shortly before the company filed for bankruptcy that its current liability was 94-percent funded. Yet, after the bankruptcy filing, the pilots learned that the plan was only 33-percent funded on a termination basis.
To get the most recent information available, go directly to the plan administrator. Check to see if the PBGC covers the plan. Funding numbers typically change, so you'll need to monitor them. Current liability funding often moves with the markets. Compare the plan's net asset value at the start of the year with its value at the end of the year.
Assess the overall financial soundness of the company and the industry. Is the company's credit good or bad? A company's financial health can change quickly, of course-how many employees of United Airlines in the late 1990s would have thought their company would file for bankruptcy a few years later? But the long-term outlook for a company and industry at least provides some measure of the company's ability to fund the plan's obligations.
What happens to your pension payments if the worst happens-the plan is terminated? Pension plans pay insurance fees into the PBGC, which in turns takes over making pension payments should a particular plan fail. The problem for retirees is that the government agency is limited to how much it can pay out per worker.
For example, the maximum payment from PBGC for someone retiring in 2005 at age 65 is $45,614 a year, or $3,801 a month. At age 60, they'd receive a maximum of $29,649 a year. Thus, higher-paid employees won't receive all of what they would have received from their plan.
For example, some United Airlines pilots retiring at the mandatory age of 60 are qualified to receive $100,000 a year in annual benefits, or $8,333 a month. Yet the most they'll receive monthly from PBGC will be $2,471.
Furthermore, PBGC bases payments on money earned up to the point the plan terminates. You can't earn additional benefits. If you're 55 and work another 10 years at the company, your payments will be smaller than if the plan had remained solvent until you reached age 65.
What can workers do to minimize the impact of a potential pension insolvency?
Move on: The most drastic, but sometimes necessary move, is to change employers or even industries. You might then take a lump-sum payout from the pension plan (if allowed) and roll it over into an IRA, though you should discuss this with your financial advisor before doing so.
Build your own pension plan: If you stick with your employer, contribute to that employer's defined-contribution plan, such as a 401(k), if available, or contribute to an IRA or consider annuities. You'll control these accounts.
Go easy on company stock: If the company's pension plan is in bad shape, the stock is likely to be in bad shape, too.
Decrease risk in other areas of your portfolio: Guaranteed pension plans are usually viewed as a lower-risk source of income, so if the plan is in doubt, you'll want to reduce portfolio risk in other areas.
Paul Coan is managing partner with Wealth Planning & Management LLC, a fee-only registered investment advisor, and author of "Asset Protection and Wealth Preservation." Views expressed here are the writer's.