Is Your Employer Pension in Trouble?

Thanks to longer lifespans and many years of comparatively low interest rates depressing returns on pension fund investments and years of underfunding, many private pension funds are having trouble remaining solvent. This is particularly true for private multi-employer pension funds.

We do have a safety net – in theory. If the pension portfolio of investments is not enough to pay promised benefits to retirees, then the Pension Benefit Guaranty Corporation, a quasi-government agency that exists to protect workers from the prospect of failing pension plans, is supposed to take over the pension fund assets and pay out minimum promised benefits. The program is funded by charging pension funds a small premium for every plan participant, and protects about 41 million workers nationwide in 24,000 separate private pension plans.

However, a recent Heritage Foundation report concludes that multi-employer plans have been chronically overestimating investment returns and interest rates, while underestimating how long their plan participants will live, resulting in chronic and pervasive underfunding. Multi-employer plans seem to be at the highest risk if insolvency.

When these pension funds begin to fail, will the Pension Benefit Guaranty Corporation have the assets in hand to pick up the slack? Perhaps not: The PBGC’s board of directors raised the alarm in their 2014 Annual Report:

“BGC’s multiemployer program is itself on course to become insolvent with a significant risk of running out of money in as little as five years…. When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits for insolvent plans.”

If enough multi-employer plans fail to cause the PBGC’s multi-employer program to become insolvent, that would put as many as 1 million workers out of the total of 10.4 million workers covered by the program at risk of receiving substantially lower pension benefits than they were originally promises. For example, the Government Accountability Office’s own report on the PBGC’s fiscal troubles states:

If the [multiemployer] fund were to be drained by the insolvency of a very large and troubled plan, we estimate the benefits paid by PBGC would be reduced to less than 10 percent of the guarantee level. In this scenario, a retiree who once received [a] monthly benefit of $2,000 and whose benefit was reduced to $1,251 under the guarantee would see monthly income further reduced to less than $125, or less than $1,500 per year.

That is, these workers could see promised benefits slashed to six cents on the dollar.

What is to be done?

For any individual company pension, the obvious solution is to tighten the company operating budget and find money to increase pension contributions. However, multi-employer plans are in a bind: If they increase mandatory contributions, the extra burden could cause some of their member firms to go out of business, or declare bankruptcy. At the policy level, it’s a tough nut to crack.

There are things that can be done at the individual level, however:

1.)   Don’t rely entirely on these pension plans for your retirement security.

2.)   Diligently save on your own in retirement accounts, defined contribution pensions such as 401(k)s, and the like.

3.)   Consider other tax-advantaged strategies for long-term savings, including annuities, which accumulate tax-deferred, and permanent (cash value) life insurance.

4.)   Save in taxable accounts as well.

5.)   Consider taking lump sum distributions from struggling pensions when they become available. You could take those balances and convert them into an annuity with a highly-rated insurance company with ample capacity to pay its claims, as opposed to a chronically underfunded and under-insured pension.

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