March, 2010

What Happens To Your Pension Benefits If Your Private (i.e. Non-Government) Employer Terminates Your Pension Plan?

Introductory Comments

Thousands of companies have either closed their doors for good or have suffered substantial financial setbacks since the onset of the recession (depression for many people) in December, 2007. Many of these companies, as a result, have either decided or were forced to terminate their employee pension plans. What happens to these pension plans, retiree pension benefits and pension plan contributions from active employees under such circumstances?

Pension Benefit Guaranty Corporation (PBGC)

Under the circumstances noted above, the PBGC enters the picture. The PBGC is a federal corporation created by the Employee Retirement Income Security Act (ERISA) of 1974. The PBGC's principal purpose is to provide pension insurance programs that guarantee workers' benefits in private pension plans. The objective of the PBGC with respect to private pension plans is similar to that of the FDIC with respect to customer bank deposits - i.e. it is an insurer of last resort.

History Of The PBGC

The first private pension plan in the United States was established by the American Express Company in 1875. Additional pension plans were added after that by various utilities, banking and manufacturing companies. Most of the early pension plans were so-called "defined benefit plans" in which workers received a specific monthly benefit at retirement, funded 100% by employers.

Prior to 1974, there was little or no insurance protection for pensions. The major impetus for pension insurance came about after Studebaker, in 1963, terminated its employee pension plan resulting in the loss of promised pension plan benefits for more than 4,000 auto workers at its plant in South Bend, Indiana. The Studebaker situation led to some pension reform legislation in 1967, but it wasn't until 1974 that the PBGC finally came into existence.

Management/Governance Of The PBGC

The PBGC is headed by a Director who reports to a Board of Directors consisting of the Secretaries of Labor, Commerce and Treasury with the Secretary of Labor as Chairperson.

The Director oversees an Executive Staff which includes a Deputy Director, Chief Management Officer, Chief Insurance Program Officer, Chief Financial Officer, Chief Operating Officer, Chief Information Officer and General Counsel.

The PBGC is also aided by a seven-member Advisory Committee appointed by the President of the United States. The Advisory Committee represents the interests of labor, employers and the general public. Its specific responsibilities include the following:

1. advising on policies and procedures for the PBGC's investments;
   
   
2. advising on the trusteeship of terminated plans;
   
   
3. advising on other matters as determined by the PBGC;
   
   

Scope Of The PBGC's Activities

The scope of the PBGC's activities is as follows:

1. protects/insures the retirement incomes of more than 44 million American workers in more than 29,000 private-sector defined pension benefit plans;
   
   
2. pays retirement benefits to nearly 750,000 employees in 4,000 pension plans that had ended and were taken over by the PBGC;
   
   
3. is responsible for the current and future pensions of about 1.5 million people including those who have not yet retired and/or those who participate in multiemployer plans;
   
   
4. works with companies with PBGC-insured plans and the pension professionals who assist them;
   
   
5. serves a wide range of customers interested in retirement planning and pension plans such as Congress, Federal Agencies and State Government, the General Public, Media and PBGC Employees and Contractors.
   
   

Where Does The PBGC Get Its Funding?

The PBGC receives no funds from general tax revenues. It receives its funding from the following sources:

1. insurance premiums set by Congress and paid by sponsors of defined benefit plans;
   
   
2. investment income from investing premiums received in the stock, bond and private equity markets;
   
   
3. assets from pension plans trusteed - i.e. taken over from companies - by the PBGC;
   
   
4. recoveries from companies formerly responsible for the pension plans.
   
   

Types Of Pension Insurance Programs Available From The PBGC

The PBGC offers the following two types of insurance programs:

1. the single-employer program which protects about 33.6 million workers and retirees in approximately 27,600 pension plans;
   
   
2. the multiemployer program which protects about 10.4 million workers and retirees in approximately 1,500 pension plans. The multiemployer plans result from collectively bargained agreements involving more than one unrelated employer, usually in a single industry.
   
   

Types Of Pension Plans Covered/Not Covered By The PBGC

Specifically, the PBGC insures most, but not all, "defined benefit plans" which promise to pay a specific monthly benefit at retirement.

The PBGC doe not insure the following types of pension plans:

1. "defined contribution plans" such as profit sharing or 401(k) plans which do not promise a specific monthly benefit at retirement;
   
   
2. "defined benefit plans" offered by "professional service employers" (such as doctors and lawyers) with fewer than 26 employees, by church groups or by federal, state or local governments.
   
   

You should request the following information from your employer or plan administrator:

1. a copy of the Summary Plan Description (SPD) which will tell you whether your pension plan is covered/insured by the PBGC;
   
   
2. information as to whether your pension plan is underfunded. If so, it may be a candidate for future failure and takeover by the PBGC;
   
   

What To Do If Your Pension Plan Ends

If your pension plan ends, you should take the following steps:

1. look for official notification as your employer or plan administrator must notify you in writing. The termination notice, known as the Notice of Intent to Terminate, must be received by you at least 60 days before the termination date;
   
   
2. complete and return all requests for information immediately;
   
   
3. review the benefits information provided by the PBGC via mail or at its website;
   
   
4. look for information meetings held by the PBGC and make sure that you attend.
   
   

Current Financial and Business Status of The PBGC

The key current financial and business elements are as follows:

1. for the fiscal year ended 9/30/09, the PBGC had an overall DEFICIT of $22 billion which compared with an $11.2 billion DEFICIT for the fiscal year ended 9/30/08. Hence, the overall deficit doubled in one year;
   
   
2. the PBGC's potential exposure to future pension losses from financially weak companies increased to $168 billion as of 9/30/09 versus $47 billion as of 9/30/08. Hence, the PBGC's exposure increased by 3 ½ times in one year;
   
   
3. legislation was introduced in Congress in 2009 to revamp the PBGC's governance after it was discovered that the Director of the PBGC from May, 2007 - January 2009, Charles E. F. Millard, had inappropriate communication in 2008 with 8 of the 16 Wall Street firms that bid on managing $2.5 billion of the PBGC's assets. Under questioning from Congress in May, 2009, Mr. Millard took the Fifth Amendment;
   
   
4. the current Acting Director of the PBGC is Vincent K. Snowbarger, a former attorney, who also serves as the Deputy Director of Operations. Mr. Snowbarger is a former U.S. Congressman from Kansas and also served in the Kansas House of Representatives for 12 years. In November, 2009, Mr. Snowbarger said "Exposure to future (pension plan) terminations means that we could face much higher deficits in the future. We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program;"
   
   
5. in November, 2009 President Obama nominated Joshua Gotbaum, an investment banker and operating partner at Blue Wolf Capital Management LLC, a New York - based private equity firm. Mr. Gotbaum, who is among over 70 Obama nominees who have not yet been confirmed by Congress, has an interesting background as evidenced by the following:
   
   
   1. he was a court-appointed trustee of Hawaiian Airlines during its Chapter 11 bankruptcy which began in 2003 and ended in 2005. At the conclusion of the bankruptcy, Gotbaum proposed to the bankruptcy court that he receive an $8 million bonus for his work, part of the $9.1 million compensation package that he asked the airline to pay. Other parties called Gotbaum's request "outrageous" and said he took credit for every achievement at the airline, even though most of the work was done by the airline's top executives.
      
      The U.S. Bankruptcy Court Judge finally approved an additional $250,000 as part of the final pay package which included $1.7 million in previous compensation and reimbursements;
      
      
   2. he was the Executive Director and CEO of the September 11th Fund, which was established by the New York Community Trust and the United Way of New York, to meet both the immediate and long-term needs of the victims, families and communities affected by the attacks on the World Trade Center and the Pentagon. At the last count, over $510 million had been received by the Fund of which $340 million had been distributed. The remaining $170 million is to be used for mental health counseling, employment assistance, health care, legal and financial advice, cash assistance and help for school children, small businesses and non-profits.
      
      

Concluding Thoughts

I offer these final thoughts for your consideration:

1. as many more companies suffer financial setbacks in the years to come, more pension plans will be terminated and taken over by the PBGC;
   
   
2. the PBGC is already in a deficit position. The deficit will only grow larger as they assume responsibility for more terminated pension plans;
   
   
3. the recent and proposed leadership of the PBGC don't give me "a warm and fuzzy feeling" that the PBGC will be managed in a way to benefit Americans who have pension plans covered by the PBGC;
   
   
4. retirees can expect to see reductions, likely substantial reductions, in their anticipated monthly pension benefits in the years to come;
   
   
5. don't wait around for one more government agency (in this case the PBGC) to bail you out. If you do, you will be sorry.
   
   

In closing, I leave you with the words of French philosopher and political economist, Betrand de Jouvenal:

"A society of sheep must in time beget a government of wolves."