Mom got a notice today that her pension is "endangered" it is only funded at 53% and they estimate only 10 years left on it. She is very upset and worried. What is the actual likelihood that the pension will have to slash benefits to stay solvent? Has anyone been through this? What should she be aware of? First, Let's make sure you understand the notice:
"funded at 53%" - this means that the plan has 53 cents for every $1 the actuary estimates it needs to fully pay all the benefits owed.
"estimate only 10 years left on it" - This is the total assets in the plan divided by the benefits paid out last year. This does NOT mean that the plan can only pay benefits for 10 years. It means that if no one put another dime into the plan AND it had no investment returns at all AND the benefit payments didn't change at all (no one died or retired), the money would last for ten years. Lot of if and ANDS in that.
Some other info you need to know:
That your mother got the notice indicates that she is getting a pension from a union pension plan. MANY of these are in bad shape financially, so she is not alone.
In these situations, the union and the various employers who continue to contribute to the plan are responsible to improve its funding over time. This is generally done by increasing contributions related to active workers.
Employers cannot escape their obligations to the plan without going bankrupt. Even if they leave the plan they must commit to fully funding the obligations they've created over the next 20 years.
If these measures do not improve the funded status of the plan, the plan can cut benefits. In general, this starts with active employees who still have many years to retire. Retiree benefits are rarely cut and only as a last resort.
In the event that contribution increases are not possible because all employers leave and the plan still goes bankrupt, a quasi-government agency called the PBGC is responsible for paying benefits. The formula the PBGC uses to determine the maximum it will pay is described in the notice. It generally amounts to a few hundred dollars per month in union plans.
You may be rightfully asking "How'd it get this bad?" The answer of course, depends on the plan and its actual history, but there are usually a couple common reasons:
Asset returns in the 1996-1999 time period were great. Unions during that period often felt they could skip contribution increases in favor of other things (like pay raises, better work rules, etc.). Union trustees also saw big returns in the stock market so they shifted money there to try and increase fund returns. Then 2000-2002 hit and stock market returns were the worst ever. Plans that made a big bet on the market lost big time and if they were only ok in 1999, they were in trouble by the end of 2002.
My advice to you and your mother is that you should not panic, your pension is not in danger yet. However, it says that you should get actively involved in letting the union know that the benefit is important to you and the union needs to better manage its assets and fix the funding problem. Your question doesn't give us much detail. But your Mom should:
(a) contact her pension administrator (probably a financial services firm) and ask for an explanation of the likely future of the pension plan--among other things, she should ask whether there is a possibility the pension plan will be terminated, and if so, what will happen to the employees and retirees covered by the plan;
(b) if your Mom is represented by a labor union, contact a union steward and ask the union to help (chances are the union is already involved, but maybe they can help your Mom understand the situation better); and
(c) contact the Pension Benefit Guaranty Corp. in Washington, D.C. (see the .gov link below) and find out if it covers your Mom's pension plan. The Pension Benefit Guaranty Corp. provides federal "insurance" of pension benefits up to certain limits ($49,500 per year if your Mom is the only beneficiary of the pension and the pension plan terminates in 2007). However, the Pension Benefit Guaranty Corp. doesn't cover all pensions. If it does cover your Mom's pension plan, she will probably be protected (subject to the annual limit of $49,500, but that's more than enough for the pensions most people get). If the pension is not covered, she should ask the pension administrator whether a state agency or private insurance company covers any of her pension benefits. These last two possibilities aren't likely, but it doesn't cost anything to ask.
Hopefully, your Mom's pension will be covered by the Pension Benefit Guaranty Corp. But if things don't look so good, she may need to think about taking measures like selling her house, if she has one, or taking a reverse mortgage against the house. For ideas about ways to finance retirement, take a look at the webpage below. |
