It’s no secret that more and more corporations have frozen their pensions, reduced benefit payouts and otherwise reneged on promises to fund employee retirements.
Remember the hundreds of airline employees who worked 30 or more years only to have their pension benefits slashed? Even public pension accounts for seemingly secure state and local government workers have been significantly eroded by stock market and recession problems.
If you are one of thousands of workers planning on pension income to provide enough money to retire, then you may be wise to reconsider your retirement planning strategy.
How Pensions Are Different From Retirement Accounts
Pensions are different from 401(k) accounts, IRAs, Roth IRAs, SEP-IRAs and other types of self-funded retirement accounts. These self-funded retirement plans allow you to divert a portion of your current income for retirement. Your employer may match some or all of your contribution, and you may have to wait a period of time for the employer-contributed portion to be fully vested. But you otherwise own the retirement account and can roll it over into another retirement plan if you leave your current employer. It is your property and titled in your name: you own it – and that is critically important.
Pensions are different because they are just promises to pay. They are usually managed by a third party and owned by your employer – again, a critical distinction. Payouts are typically determined by complex formulas based in part on your earnings, retirement age, and years of service to the company.
Even though you don’t own your pension, that money is not without protection. The Employee Retirement Income Security Act (ERISA) of 1974 prevents creditors from claiming pension assets in the event of bankruptcy. And after the airline bankruptcy/pension fiasco, Congress passed the Pension Protection Act of 2006. This law changed corporate pension funding rules to reduce the number and degree of underfunded plans. In light of the recession, though, Congress extended deadlines for meeting funding targets (that is not a good thing for retirees).
Most defined-benefit, corporate pension plans are insured by the Pension Benefit Guaranty Corporation. Insurance premiums paid by employers fund the PBGC which makes up shortfalls in benefit payments in the event the employer is unable to fully fund the account. The law establishes annually adjusted, age-based payout limits; those limits are the maximum the PBGC pays out in the event an underfunded account goes belly-up. This means that if your plan promised you more than the maximum insured amount, you could lose out on the difference if your employer defaults.
That is a problem…
How Risky Are Your Retirement Benefits?
Stock market and recession troubles have drastically reduced the value of many pension accounts, both public and private, leaving a greater number of accounts with a funding shortfall.
A 2010 study estimated shortfalls up to $2 trillion dollars. This is a very dangerous development for current retirees and those planning retirement based on an expected pension. In the event a pension plan is underfunded, payout limitations may kick in which could limit both the size and type of payout you are eligible to receive.
Increasingly stringent pension funding regulations are motivating more companies to freeze existing pension plans and/or swap them for defined-contribution retirement plans. If that happens to you, you may still be entitled to any money previously promised, but you would stop accruing additional benefits. Since benefits tend to be greater for later years of service, the loss of just a few years of accrual can be substantial. If you were counting on your pension benefits as a primary source of retirement income you could be left in a lurch.
If you are close to retirement, odds are you may have failed to save sufficiently during your high earning years in expectation of that pension. People who bet on pensions for retirement also typically fail to save early in their career, causing them to lose the early years of compound growth and leaving them with a daunting amount of savings to accrue late in career. Don’t make these fatal retirement planning mistakes.
If you started a career expecting to retire on a comfortable pension, you should take steps now to ensure that you don’t get caught by surprise if your employer decides to end its plan. So what can you do to protect yourself? You can’t change the rules or the funding status of your pension plan, but you can arm yourself with knowledge and have a backup plan in place. Find out, in writing, the funding status of your employers plan. Learn more about your rights and how pensions are regulated from the Pension Rights Center. Even if you expect to receive a pension, it’s not too late to develop your savings strategy and figure how much to save for retirement. It’s better to be safe than sorry.
Guest contributor Christa Blair writes about financial education and retirement planning for FinancialMentor.Com. She suggests to put it all together by working with an experienced, professional retirement coach who can help sort out the complex issues. When she’s not writing, she’s playing with her Doberman pinscher puppies.