Looking for Help in a Pension Crisis

In case your company gets into financial trouble, your pension is likely insured by a government agency to provide payment. But the rules can get complicated. Know your rights and responsibilities, and find out what effect such a situation could have on your retirement benefits.

September 8, 2003

When companies get into financial trouble, they often don't put enough money into their pension plans to meet their obligations to workers and retirees. If a firm goes bankrupt or files to reorganize under Chapter 11, a federal agency called the Pension Benefit Guaranty Corp. (PBGC) may take over the firm's pension plan and assume responsibility for retirees' benefits.

Payer of Last Resort

PBGC was created in 1974 as a federal corporation and today serves as the payer of last resort for nearly 44 million workers and retirees in more than 32,000 private defined-benefit plans. Currently the agency administers nearly 3,000 plans and guarantees benefits to the 783,000 workers and retirees in those plans. By mid 2004, the number of workers and retirees covered by PBGC is expected to swell to more than a million.

In the wake of the bear market and recession, corporate bankruptcies have increased and so has the number of underfunded pension plans. Most companies eventually surmount their problems and honor their pension commitments.

But if your company terminates or walks away from its pension plan, odds are PBGC will step in. The agency can also take over a pension plan if it determines that such a step is necessary to "protect the interests of plan participants."

Only employees with pension plans covered by PBGC are protected if a company goes bankrupt or reorganizes itself. Plans with fewer than 26 employees offered by professional service employers -- such as doctors and lawyers -- are not insured. Likewise, plans sponsored by church groups and federal, state and local governments are not covered. To determine whether your pension is insured by PBGC, check your plan's "Summary Plan Description," which is available from your plan administrator.

An employer can terminate a pension plan in two ways. The first is a standard termination, during which a company demonstrates to PBGC that it has enough assets in its pension plan to pay all the benefits it owes to participants. The plan then buys each participant an annuity with a lifetime benefit or, in some cases, pays the benefit in a lump sum. PGBC requires only that the company notify you of its intention and provide you with the name of the insurance company.

With a distress termination, PBGC plays a bigger role because your employer is either bankrupt or petitioning to reorganize, or the agency sees a problem that could threaten your pension. For instance, if your company goes bankrupt and its pension plan is underfunded, PBGC may take over the plan and pay pension benefits up to its preset maximum level.

Your Right to Know

Depending on the situation, as an employee or retiree, you are entitled to know:

When your plan is underfunded. If your company has not paid enough into its pension plan, you must be notified. The notification is triggered when a plan is less than 80% funded for a period of less than two years. You should receive a written notice of the plan's funding percentage and information about PBGC's insurance guarantees.

You also have the legal right to request this information at any time from your plan administrator. Unfortunately, digging out and deciphering the information may not be easy. Your company may simply give you a copy of its annual financial report, where information on the pension plan is buried in the footnotes.

If you have qualms about your employer's financial viability or the way your plan is being handled, get a copy of the free handbook Protect Your Pension -- A Quick Reference Guide, which is available from the Labor Department's Employee Benefits Security Administration. You can view it online or call 866-444-3272 for a copy of the guide.

When your plan is terminated. If your pension plan is being shut down, the plan administrator must notify you in writing with a "Notice of Intent to Terminate" at least 60 days before the termination date.

With a standard termination, you should receive a second letter about six months after the termination date. This is your "Notice of Plan Benefits," and it sets out the benefits you will receive when you retire.

In the case of a distress termination, PBGC will contact you. At that time, you'll receive general information about the pension insurance program and the agency's guarantees. After it has reviewed your plan's records, assets and liabilities and your right to benefits, you will receive additional details and information about the size of your benefit. But a final accounting of what you're due -- your determination letter and benefit statement -- can take months or years, as the agency must wait to see what assets it can recover in court.

How Your Benefit is Determined

If you are receiving a pension when your plan is moved to PBGC, you'll continue getting monthly checks while the agency reviews the books. The amount of these interim payments will reflect the agency's estimate of your eventual pension benefit. If the estimate turns out to be less than your actual benefit the agency will make up the difference in one lump sum, with interest. If more, that means PBGC overpaid you. To get its money back the agency will reduce your monthly pension, check over your expected lifetime until the debt is paid, though never by more than 10% of your monthly benefit.

If your aren't yet retired when your plan is terminated, once you are entitled to a full pension -- usually at age 65 -- PBGC typically pays 100% of the benefit you earned, up to a maximum payments of $3,664 a month, or $43,977 a year. The maximum limit is determined annually, and the amount you are entitled to receive is pegged to the year your plan ended. Your pension will not include a cost-of-living adjustment.

There are some circumstances where you may not get the full benefit you earned, even if your pension falls below PBGC's maximum. For example, if your employer bumped up your pension within five years of PBGC's takeover, you will not receive the full increase. The agency's maximum pension is lower if you retire before age 65 or elect a joint annuity. But if you retire after age 65, or if you were over age 65 and receiving a pension when the plan ended, you will get a higher benefit. To find your maximum pension amount, see the table on the PBGC's Web site. Locate the year your plan ended, and scan across the table columns to find the age when you plan to retire.

If you're married and die before naming a beneficiary, PBGC will pay your spouse a survivor's benefit starting at the earliest date your plan allowed retirement. Special rules apply for disability benefits.

About four months before you become eligible for your plan's benefits and want them to begin, notify PBGC, at 800-400-7242. Pension checks are paid monthly, but you can request a lump-sum payment if the total value of the pension is $5,000 or less. PBGC can roll the one-time payment into an IRA or other qualified retirement plan.

If you think PBGC incorrectly calculated your pension, you have 45 days from the date of the determination letter to challenge the decision. (Read the PBGC's rules for appeals.) If you need time to find a pension actuary and review the calculations, request an extension with your appeal.

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