Is Your Pension Plan Retiring Before You?Ellen Hoffman
If you're still depending on a traditional pension, it's time to put yourself on a "pension watch." In the last few months, IBM (IBM), Unisys (UIS), Verizon (VZ), and General Motors (GM), among others, have announced that they're freezing their traditional "defined benefit" pension plans.
The Pension Benefit Guaranty Corp. (PBGC), an agency created by the federal government to pay pensions to employees of companies whose plans have terminated, explains that there are several ways to freeze a plan -- by closing it to new entrants, freezing benefits for only some of the employees, or in the case of a "hard freeze," halting accrual of pension benefits based on either job tenure or salary increases.
But any way you look at it, freezes, plus actual pension plan terminations that occur when companies merge or go out of business, pose a threat to the expectation that millions of future retirees will be able to count on receiving some or all of the guaranteed pension that they expected.
When companies freeze their traditional pension plan, they may offer the affected employees a 401(k), sometimes increasing the company's matching contribution if one was already available. But when a company simply does not have the money to pay the promised benefits, or shuts down a plan, the PBGC may end up paying the retirees a pension that is adjusted annually, but possibly less than was counted on. In 2006, the top amounts guaranteed by the PBGC are $47,659.08 for a 65-year-old, 37,650.72 for a 62-year-old, and $21,446.64 for a 55-year-old. Click here to see the monthly amounts.
Some companies that freeze pensions, such as the airlines, are obviously in financial trouble and struggling to meet their obligations. But some other companies, such as IBM and Verizon, have surprised their employees by getting out of the defined benefit plan business even though they are profitable and appear to be financially healthy.
So how can you tell if your plan is in trouble? And if you're worried, how can you get information about the plan's status? Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries in Washington, says one sign to watch for is "if your company's competitors are freezing benefits" or if they simply don't offer a traditional pension at all. He cites IBM as an example, saying "none of the other high-tech computer companies are offering traditional defined benefit plans."
Another approach is to identify patterns emerging from company benefits policy, advises John Hotz, deputy director of the Pension Rights Center, an advocacy group based in Washington. "Has the company been shifting employee and retiree health costs? Did the company have a supplemental 401(k) with matching that the company no longer matches?" These may be signs that further benefit erosions could occur, he says.
Martha Priddy Patterson, a director in the Deloitte & Touche human capital practice in Washington, says "the single most important way to know if your pension is likely to be in trouble is to know how committed the CEO is to continuing pensions." You may or may not be able to find this out by asking the CEO, other executives, or the human resources department directly.
But a recent survey does shed some light on how corporate executives are thinking about this issue. The results suggest that the warning signs that your pension may be in danger are the same ones you'd look for if you were contemplating a purchase of the company's stock.
In a March survey by Towers-Perrin HR Services, based in Stamford, Conn., executives said that negative developments in any of the following could trigger a freeze in their defined benefit pension plans: company cash flow (cited by 60%), company earnings (48%), lower credit rating (43%), company share price, shareholder's equity, or administrative costs of managing the plan (21%).
You can track some of these benchmarks -- such as earnings and share price -- by simply paying attention to announcements and reports, such as the annual report, that your company press office is issuing. If your company is publicly traded, other data are available by using investor tools such as those from Standard & Poor's on this Web site. (Scroll down the right column to enter the ticker symbol).
Current credit ratings are available by entering free registration here, and searching on the company name. You can read an explanation of the ratings by clicking here on Fact sheet -- Understanding Credit Ratings.
For companies that are not public, it may be difficult to get financial information from the owners, but the federal government requires employers to submit reports that reflect the company's overall health and include information on the status of pension plans. Some of the required reports go directly to participants; others are filed with the Labor Dept.. Click here to see a list of these reports, deadlines for filing them, and their contents.
Two reports that your employer is required to send you are the PBGC "participant notice" that tells you if your plan has been less than 80% funded for the past year or two and less than 90% funded for several years, and the Summary Annual Report (SAR), which includes information such as the return on the pension plan's investments.
CHECK IT OUT.
However, both of these documents are based on the company's Form 5500, a detailed technical annual pension plan report to the Labor Dept. that employers are required to submit by the end of the seventh month after the plan year, meaning that the information is always going to be somewhat out of date. If you're in a pension plan, you're entitled to get a copy of the most recent Form 5500 within 30 days by making a written request to your plan administrator.
If your comfortable retirement depends on a guaranteed pension, be sure to collect and save every bit of information you receive about your plan, including the annual statements of benefits you've accrued. When you receive new information, compare it with what you've received in the past. For example, check to see how your projected pension benefit compares with the amount you would get from the PBGC if the agency took over your company plan.
When successful companies like the ones in the news freeze their pension plans, it's time to be realistic and admit that this could happen at your company too. The one common theme that emerges from all of the experts' tips is this: Start paying attention to the information your employer is putting out to the public and to investors, to the priorities reflected in your company's financial and human resources decisions, and to what is going on in your industry and among your competitors.
If you don't like what you are seeing and hearing, calculate what the impact would be on you if your pension were frozen, and redouble your commitment to accumulating retirement assets outside of the company pension plan.
In addition to writing Your Retirement for BusinessWeek Online, Hoffman is author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com.