If you work for a company that has a pension, should you be worried?
What protections do you have?
Will all the money you have been paying into your retirement just be gone?
Recently, American Airlines filed for Chapter 11 bankruptcy leaving many wondering “What happens to their pension?“.
Whether you’re an employee of theirs or any other company that offers a pension, here’s what you need to know.
Insurance On Your Pension Plan
Fortunately, it is not as bad as most people think…maybe. There are safeguards in the United States to prevent you from losing your pension plan.
In the United States, every defined-benefit retirement plan is insured, at least to a point. Most will receive all or at least most of their company pension even if your company goes bankrupt. However, in some cases, it may not be every penny you expected.
(Also, be sure to check out my article on, Should I Roll My Pension Into an IRA for some options on your pension plan.)
What Happens When a Company Goes Bankrupt?
When a company goes bankrupt they have two choices. They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate.
The pension plan is usually terminated in reorganization and always terminated in liquidation.
So, then what happens? A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov) takes over the pension payments.
Here’s some information on the PBCG taken from their site:
The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.
Only employees with the largest pensions actually take a hit. The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65.
As with any insurer, the PBGC has some restrictions. For example, it prorates recent pension increases.
However, in all, 84 percent of retirees get their full pension even after bankruptcy.
A Few Rare Cases Under Reorganization
In a few rare cases of a company bankruptcy reorganization, the employer maintains his/her pension plan. That normally only happens for one of three reasons.
- The benefit is low
- Employee turnover is high
- The pension plan is new
Avoiding Bankruptcy is Better For The Company
In most cases, however, it is always better for the company to avoid bankruptcy altogether. In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act’s strict rules governing pension funding.
As counter-intuitive as it may seem, this is one move that endangered workers should embrace.
As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, “Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution. It’s better to stay in business than make a pension contribution.”
American Airlines Pension
In American Airline’s case, they are filing for Chapter 11 bankruptcy protection. In this case, the PBGC may need to step in and assist with their pension obligations.
The Pension Benefit Guaranty Corp., created to protect private retirement benefits, may be unable to cover the loss because Congress has limited the size of pensions it can pay, Director Josh Gotbaum said in a statement.
“Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically,” Gotbaum said in the statement. The PBGC will encourage American to “fix its financial problems” and keep its pensions intact, he said.
In the meantime, AMR employees seem to be protected. But a quick look at the numbers doesn’t seem too reassuring.
Recent numbers show that they have about $8.3 billion in assets to cover the $18.5 billion in pension liabilities. If AMR has no choice and has to terminate the plan, that would leave the PBGC on the hook for a cool $17 billion.
Chump change for the PBGC, right? Don’t be so sure…
Strength of the Pension Benefit Guaranty Corporation
Just like the FDIC, the financial strength of the PBGC hardly ever gets questioned. Unfortunately, these are unique times and it seems that no entity is out of harm’s way.
Lowering interest rates and rising corporate defaults has led to a $33.5 billion deficit in the first quarter of 2009 for the PBGC. This is the largest deficit for the 35-year-old agency which is an increase from the $11 billion deficit ending fiscal year 2008.
Acting director Vince Snowbarger says,
“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”
The Deficit Continues
For 2011, the PBGC just encountered it’s largest deficit while insuring 1 out of every 7 Americans. The Pension Benefit Guaranty Corp. was quoted as saying it ran a $26 billion imbalance for the budget year that ended Sept. 30.
Their pension obligations rose by $4.5 billion as they currently insure over 44 million Americans. Does it make you nervous? It would make me.
How Does This Affect You?
If your company files for bankruptcy or you fear that it will, I would contact the PBGC and talk to them directly.
Be sure to visit their website frequently and check for updates. You are basically in their hands and you have limited choices.
If you have the option, consider rolling your pension into an IRA to get it out of your company’s hands. I’ve had many clients do this so that they never had to worry about this.
Be sure to consult a financial planner and/or tax advisor before implementing this step.
DAVE MORELLI says
WHAT IS THE STATUS WITH KMART . I THOUGHT THEY WERE COVERED BY THE PBGC. RECENTLY I HAVE BEEN TOLD OTHERWISE. THANK YOU
Jeff Rose says
Hi Dave – Check with the PBGC website. But since they’re in bankruptcy now (through Sears) no claim has probably been entered yet.
carmen saunders says
I worked for United Home Health Care Services and they filed bankruptcy and I never received my pension. I am 71 years old, I was wondering if there is anyway I can get some help.
Jeff Rose says
Hi Carmen – Check with the Pension Benefit Guarantee Corp (PBGC) and see what recourse you have, and what benefits may be available to you. They’re the US government agency charged with overseeing defaulted pensions.
Patrick King says
My mother-in-law’s husband just passed away and didn’t leave a very good paper trail about his pension. I finally found who he worked for , only to find the company went out of business a few years back. He worked for A.J. Bayer Co out of Los Angeles Ca. How would I find out about his pension and if she is entitled to all, part or none of his pension? That is if there is a pension to be had. Thanks
Jeff Rose says
Hi Patrick – You can do a follow up on the company, and find out who the successor company might be on the pension. Also check with the Pension Benefit Guarantee Corp to see if they were involved in some way. It’s unlikely that the pension just disappeared with the company. Those funds are supposed to be held in trust. But also consider that since he kept poor records, it’s also possible that he took a full distribution from the plan and never told anyone. Good luck!
Lyna Tilley says
I worked for a firm for 24 yrs and was covered by an employer paid pension plan. The firm now closed and filed for bankruptcy for liquidation. I am told that the pension plan will be liquidated also. I was also told that it takes 6 to 8 months and first the actuary purchases annuities for those already receiving a monthly pension. If all money is gone, they confiscate the rest and I will be left with nothing. I was supposed to received a little over $500 a month as a pension when I retired. I will be of retirement age in the next 7 years. Am I going to lose this money like I was told? Who decides who gets paid and who does not?
Thank you for your comments.
Jeff Rose says
Hi Lyna – Each bankruptcy situation is different, and so is the financial situation of its pension. I’d contact pbgc.gov and see if they’re involved in this, and if so, what you can expect from your pension.
Marva jackson says
My. Husband worked a company for 16 years before he passed. He set up his pension where I would draw a small amount if he died now that the company has filed for bankruptcy am I entitled to a pay out
Jeff Rose says
Hi Marva – Your husband’s pension is probably covered under the Pension Benefit Guaranty Corp (PBGC) which is a pension insurance plan sponsored by the US government. But apart from the PBGC, a pension is usually managed by an independent trustee. Even if the former employer goes bankrupt, the plan should continue through the trustee. Contact the trustee to get all the details – you should be alright.
Mel says
My husband retired from American Airlines before he was due to be laid off after 25 years of service. We are currently separated. He is only 44. Will he receive a pension from the company when he reaches retirement age, despite cashing out his 401K when he “retired”? He cashed out against my advice and his new career has his starting from the bottom. Also am I entitled to a part of his pension when he reaches the age to collect, because we aren’t divorced?
Fred Smith says
The figure of $ 54,000 is the maximum amount that the PBGC will pay for a single employer Defined Benefit Plan. There are about 35 Million people in such plans. The maximumum amount that the PBGC will pay the 10 million people with a Multi employer plan is way lower, currently, about$12,870. The difference is due to the amount of insurance premiums that the plans pay. A multi Employer plan pays premiums of $( per person per year. This was recently increased to $12 per person per year. Single Employer plans pay $35.00 per person per year with an additional amount for each $1,000 in unfunded liabilities. Congress sets the benefit rates and premiums.
Switching to a 401K or IRA might be a solution but if the stock market tanks, you may likely find it is a bad solution. An annuity might be better, but they also have problems.
The PBGC itself is in financial trouble and expected to run out of money in 10 to15 years unless Congress steps in to give them some money. Currently Congress is not in the mood to bail out pensions. They have spent nearly $2 trillion on wars in the middle east and are loathe to spend money on American retirement promises
Fred Smith
jason says
my father had 9.8 years out of the 10 years he needed in order to qualify for his central states pension.
the truckin company he worked for went bankrupt in 2002 so he lost his job or else he would have had a full ten years . he just recently died and my sister and i were informed we couldnt collect on his pension because he need 19 more days to complete his full 10 years and get benifits. is there any way we can appeal this case ?
Mike Pyle says
I worked for Sears for over 18 years and left the company in 1994. I am vested in a pension plan that is fully funded by Sears. I did not contribute any money to this plan. I do not turn 65 until the year 2023. I was recently notified from Sears that they are offering a lump sum payout on the pension plan or I can roll over into an IRA or my current employers 401(k) plan. Another option is to leave this where it is and receive the monthly payments when I retire. What if Sears fails as a company and goes out of business? Do I lose it all or any? Thank you.
Jeff Rose says
@ Mike No, you would not lose it all. That’s what the PBGC is for. Here’s some info on their site that might be able to help you. http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html
Yvette Flores says
Question… If you worked for a law firm for 25+ years and you resigned… however you left your 401k/Firm pension vested in the firm…Now the firm may file bankruptcy… what happens with your firms… can I go and request
that my funds be rolled over to an IRA fund?
Jeff Rose says
Yes, you should request a 401k rollover immediately, especially if your company is going bankrupt.
It should still be protected, but I would feel much more comfortable getting the money into my hands by rolling it over into an IRA.