Check the Health of Your Company Pension Plan

August 8, 2008 by  
Filed under Retirement Planning

If you are one of the dwindling number of employees who have vested rights in a private sector pension plan (also known as a defined benefit plan), you should make it a habit to periodically check the financial health of the plan.  Why should you do this?  Because many prospective retirees are counting on receiving all of the pension benefits that they have been promised by their employers. 

This means that these employees are not saving much (if anything) on their own to provide retirement income.  Instead, the are relying on the other two “legs” of the traditional three-legged retirement income pool: pension, Social Security, and savings.  Social Security is unlikely to exist in its present form for most future retirees, a topic I mentioned earlier and will address in future posts.

If you are in the situation I just described, your expected pension benefits are critically important to your retirement standard of living.  Now you may be thinking that you do not need to worry about your pension because even if your employer were to default on its pension obligations, the benefits are insured by the Pension Benefit Guaranty Corporation (PBGC), a quasi-governmental agency.  This is a dangerous belief for several reasons.

First, if an employer defaults on its pension obligations, the PBGC will step in but from that point forward, no more benefits accrue.  This could mean, for example, that if you are still 10 years from retirement, you may not receive vesting credit for those 10 years.  Second, the PBGC caps the size of the pension benefits it will guarantee.  Right now that cap is approximately $45,000/year.  That number is likely to shrink because the premiums that the PBGC collects from insured employers are much smaller than the benefit obligations that the PBGC has assumed.  In other words, the PBGC is grossly underfunded.  Finally, if your pension plan includes retiree health coverage, the PBGC does not insure those.  Losing that coverage could be the biggest financial hit of all.

So, how does an employee quickly check the financial health of his/her pension plan?  There are two ways that I know of.  The first is to read your employer’s most recent 10-K filing with the Securities and Exchange Commission.  The SEC provides a convenient website for locating and reading 10-K filings.  In your employer’s 10-K filing, there should be a table that lists the “value of plan assets at year end” for its pension plan as well as “benefit obligations at year end.”  If the latter number is larger than the first number, well Houston, we have a problem.

A second way to access similar information about the financial health of your employer’s pension plan is to ask your employer’s benefits administrator for a copy of the plan’s most recent tax filing (IRS Form 5500).  On that form, under Schedule B, line 2A, will be a statement of the plan’s assets.  Item 2b(4) will state the plan’s current liabilities.  Once again, if liabilities are greater that assets, you have reason to be concerned.

What should you do if you discover that your pension plan is financially “unhealthy”?  I suggest that you use that information as a reason to ramp up your personal retirement savings.  You may need those savings to compensate for a reduced pension benefit that does not meet your expectations.  Anger over broken pension promises will not put food on your table when you retire.

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