If you have a pension through your employer, you are probably wondering what effect this significant economic downturn will have on your benefit. What happens if your employer goes bankrupt? Can your pension benefit just disappear? How can you receive what you are entitled to? These are important questions and you want to know what is owed to you by the company.
Most people assume that if their employer goes out of business, it takes their pension plan with it. The good news is that in most cases this is not true. The Pension Benefit Guarantee Corporation or PBGC is responsible for insuring your pension benefits. Pension plans pay premiums to the PBGC, and in the event of a company’s failure, the PBGC would take over the plan and administer it while paying out insured amounts.
In most cases, your pension benefit would be insured up to certain limits. For 2009, a 65 year old has a maximum insured benefit of $4,500 a month ($54,000 a year). So, as long as your pension benefit is equal to, or less than this limit, you’d still have your full pension benefit even if your company goes under or the pension plan terminates. Keep in mind that some types of benefits are not guaranteed, such as health and welfare benefits, severance benefits, lump-sum death benefits and disability benefits when death or disability occurs after plan termination.
Pension assets can’t be touched by creditors to pay off debts. Under federal law, the pension plan is a “separate entity” from the company sponsoring the plan and must be kept separate from an employer’s business assets. It must be held in trust or invested in an insurance contract. In the event of bankruptcy, the retirement funds should be secure from creditors.
The bad news is that if a pension plan at a company in bankruptcy isn’t fully funded, pension payments to formerly highly paid employees may be reduced. If a pension plan is terminated without sufficient money to pay all of the benefits, the PBGC pays the pension plan’s participants their benefits through an insurance fund. But, as stated above, it pays a benefit only up to a certain amount ($54,000 if you start getting payments at age 65). And that amount could be substantially lower than the income that some retirees had been getting from their pensions before their plan’s termination. Also, the maximum would be lower for those collecting payments at a younger age or for those who include benefits for a survivor or a beneficiary.
Another problem: The PBGC generally doesn’t guarantee early-retirement subsidies, which are frequently used by employers as an incentive to get older workers to leave the workplace before they reach the age at which they could max out their pension benefits. If your employer offers you an “enhanced pension” benefit, such as treating you as 60 years old instead of 55 upon retirement, you could lose that benefit if the plan is terminated and doesn’t have enough assets to cover its payments to workers. In other words, you might start getting paid instead as if you retired at your actual age — a lower amount.
So, when people are evaluating buyout offers that include enhancements of their pensions, they have to take into account that those aren’t guaranteed if there’s a problem. The extra money you thought you could count on to fulfill a retirement dream, such as building a second home? Maybe you can’t count on it after all.