Is Your Pension Safe?
Pensions are getting rare, but several of my clients have them and it is important to know how safe they are and if you can rely on the income for the future. The basics of a pension are quite simple: your company puts money into a pension plan each year to pay for current as well as future benefits. How that amount is determined, however, is open to some degree of manipulation. Many details go into the calculation, but the biggest are the actuarial calculations done based on life expectancy of employees and the expected rate of return. The higher the rate of return assumption, the less the employer is forced to put into the pension. If the returns don’t materialize, then the pension can be become underfunded and need more money later. If the company doesn’t have the extra money later, then the major problems begin. One of the largest stories of late is the problem with California’s pension system:
Pew agrees with the official CalPERS calculation that it was 69 percent funded in 2016, which is slightly higher than the 66 percent level for state pension systems nationwide. That’s a $168 billion unfunded liability – again assuming that it will meet its earnings goals, which is dropping slowly to 7 percent. (4/22/2018 https://calmatters.org/articles/commentary/commentary-the-dimensions-of-californias-pension-crisis/)
This basically means that the CalPERS system may not be able to provide what is promised to their employees unless the state finds the money to put into the system. This is just one example of many. Another example is a family member of mine who worked for United Airlines, retired, and then had his promised pension cut in half when United decided they couldn’t fund it anymore and it went to the Pension Benefit Guarantee Corporation (PBGC). The PBGC is a private organization that all pensions pay into as it operates like an insurance policy against pension defaults. However, the PBGC only pay what they can afford and it is usually a fraction of the original guaranteed amount.
If you have a pension and you haven’t retired yet, then retirement typically gives you some choices. Take a lump sum or take a guaranteed income for life. Before making that decision, you should request the annual update from your HR department about the health of your pension. It is your right under the Pension Protection Act of 2006. The current information will show you how well your pension is funded and then you can decide if you feel comfortable the pension will last throughout your life. I would say more and more of my clients are electing a lump sum option, unless the company is extremely financially secure and the pension is above 90% funded. If you would like help analyzing your pension and making a decision, please reach out to me for a complimentary consultation!