Checking Safety of Your Firm’s Pension
How safe is your company pension? Changes in the business climate, troubles at the Pension Benefit Guarantee Corp. and an increasing shift toward uninsured pension plans have made this question far more difficult to answer.
Yet the answer is vital to Americans whose main source of retirement income is likely to be their company-sponsored plan.
“You take the person who is currently employed and 40 years of age. The equity in his pension plan could be his largest single asset,” said Joseph Belth, editor of an industry newsletter called Insurance Forum. “There may be a lot of people in that position. And I would think those people would be interested in finding out how much risk is associated with that asset.”
But determining the risk is not always easy. To some extent, it requires that workers understand part of the labyrinthine Employee Retirement Security Act of 1974--the pension plan rule book.
A working knowledge of federal deposit insurance and the state-operated life insurance guaranty systems is pivotal too. And finally, knowing your way around insurance and bank ratings can help.
Why is this such an important issue now?
For one thing, the newly passed banking bill pulls the rug out from under pension plans that invest in bank investment contracts, otherwise known as BICs. These are commonly used in the most popular 401(k) plan option--the “guaranteed interest” fund.
In the past, the government’s deposit insurance system, which is backed by the full faith and credit of the U.S. Treasury, covered these accounts to $100,000 per beneficiary. Under the new law, this insurance coverage will be phased out. Consequently, if the bank fails, pensioners could find their 401(k) funds wiped out.
The recent failures of a number of large insurers have also illuminated the holes in the state guaranty association system that backs life insurance contracts. A number of state guaranty funds specifically exclude “guaranteed investment contracts”--the type of contract typically purchased to back company pensions--from guaranty fund coverage.
There are more pensions than ever backed by this type of contract though. During the past four years, roughly 30,000 companies have terminated their traditional pension plans.
Many have replaced the plans with these insurance contracts, which promise to pay pensioners set annuities in the future. But the insurers that pay the best rates, and are therefore most attractive to managers who dissolve traditional plans, are also often the shakiest firms.
The Pension Benefit Guaranty Corp., which stands behind most defined benefit programs, says it has no responsibility to pay benefits to retirees who have run into trouble after a traditional plan was dissolved.
If that weren’t bad enough, the managers of the PBGC say their fund is struggling to pay on the obligations it does cover. It had a $2-billion operating deficit in 1991, and its prognosis is bleak.
“Unless we find ways to stop the growth of our deficit, the specter of ever-increasing premiums and ultimately a savings and loan-type bailout looms in our future,” Executive Director James B. Lockhart said in a recent speech.
“I have heard suggestions that I am exaggerating our problems--that I am crying wolf,” he added. “I’ll admit we want attention. . . . (But) we have enough dead sheep to prove that there is a real wolf that needs to be stopped.”
So how do you determine whether your pension assets could fall prey to one of these newfound risks?
What you should do will be largely determined by what type of pension you have. If you have a defined benefit plan, what most people consider a “traditional” plan, you may want to find out whether your benefits would be fully covered by PBGC. If they would, you can be fairly confident that your pension is safe. Although PBGC does have financial problems, most experts believe that the federal government would bail the agency out if the problems became crippling.
If you have a defined contribution plan or if your benefits would not be fully covered, you would probably want to investigate further. The possibilities will depend on the type of plan you have and how accommodating your employer is. Some employers are exceptionally forthcoming with information. Others balk at giving out anything that’s not required.
The next article in this series is a guide to getting pension information from your employer.
