Pensions

If anyone thought they could put their retirement plans on automatic pilot, a recent flurry of articles in the mainstream press should serve as a wake up call. First came the cover story in the October 31 issue of Time magazine, entitled "The Great Retirement Ripoff," authored by Donald L. Bartlett and James B. Steele. The second appeared as the cover story of the October 31 New York Times Sunday Magazine, and is titled "The End of Pensions," by Robert Lowenstein. Both articles highlight the decline of traditional defined-benefit pension plans, the potential negative impact on future retirees and make clear that going forward, individuals will be increasingly responsible for funding their own retirement.

In the Time article, the authors highlight individuals who thought they would be living a comfortable retirement only to discover their pension benefits had vanished, usually because the company where they had worked for so many years went bankrupt and simply, and legally, walked away from their pension promises. In one particular vignette, the authors portray an extreme example of a widow who lost her husband's $1,200 a month death benefit and is reduced to collecting cans to make ends meet. There is now, the authors contend, "the dawning perception among Americans that when it comes to retirement, you're on your own , baby."

In his article, Lowesntein says bluntly American's long simmering financial debacle is not hedge funds or the real estate bubble—"it is the pension system, both public and private. And it is broken."

A few years ago, defined benefit pension plans began to feel the strain under the pressure of what financial experts call the perfect storm of lagging economic performance, poor stock market returns, and record low interest rates, according to the October 2003 issue of Kiplinger's magazine.

Today, more and more companies are falling behind in their contributions to their pension plans, leaving many of them underfunded. Watson Wyatt, an employee benefits consulting firm, reported in CFO.com in 2003 that the percentage of employers with fully funded pension plans plummeted from 84 percent in 1998 to 37 percent in 2002. A fully funded plan means there is enough money in the plan for the company to pay benefits to all retirees and workers. A pension plan is considered underfunded when it is less than 80 percent funded for a period of less than two years, according to the Sept. 8, 2003 issue of Kiplinger.com. Today, according to the Time article private-sector companies have underfunded their pensions to the tune of $450 billion.

Moreover the number of defined benefit plans offered by companies has plunged from 112, 200 in 1985 to 29,700 today. The number of active workers covered by a plan has decreased from 22 to 17 million. From 2001-2004 nearly 200 corporations in the Fortune 1000 killed or froze their defined benefit plans, according to Time.

Now comes word out of Washington that the Pension Benefit Guarantee Corporation (PBGC), the government agency that guarantees the benefits of millions of workers and retirees in more than 30,000 traditional defined-benefit pension plans, has a record $23 billion deficit, the result of taking over the pension plans for companies such as Bethlehem Steel, Polaroid, US Airways and United Airlines that have fallen on hard times. In 2000, the agency operated with a $10 billion surplus. That deficit may top $30 billion by year end and according to the New York Times article, if nothing is done, the deficit will mushroom to more than $100 billion within two decades.” While affected retirees will probably receive some relief from PBGC, it will not be a dollar for dollar match with their original pension benefit. If companies continue to shed themselves of their pension liabilities, it is only a matter of time according to Time that "individuals will assume all the risks for their retirement, just as they did 100 years ago."

The news isn't much better in the public sector. According to the Times, public pensions which are paid for by the taxpayers and thus enjoy an implicit form of insurance, are "underfunded by a total of at least $300 billion and arguably much more." The article goes on to say these will soon become intolerable burdens to taxpayers, who will eventually foot the bill. According to a 2002 report in CNNMoney, Wilshire Associates, a Santa Monica California consulting firm, a study of 93 pension plans for teachers, firefighters and other state and municipal employees indicates the percentage of underfunded plans will rise to 75 percent. The last time the figure was that high was in the midst of the 1993 recession.

Many public entities, including federal, state and local governments and some private sector companies are not covered by the PBGC, according to the Sept 8, 2003 issue of Kiplinger.com. To determine if your pension is covered by PBGC check your plan's Summary Description which is available from your plan administrator.

System Failure Unlikely
While pension experts believe a full scale system failure is highly unlikely, and that the majority of employees will probably receive their full pensions, there are some trends worth noting. Perhaps foremost, according to the Times, traditional private sector pensions will "mostly die off in a generation." The article points out that although 44 million people are currently covered by private sector plans, half of these people have already retired and are collecting benefits or their plans have been frozen or terminated. Currently only 22 million people are accruing benefits to an active pension plan, with relatively few people being added to the rolls.

Indeed, a growing number of companies are beginning to freeze their pension plans rather than make the necessary contributions to bring them up to fully funded status. One company, for example, according to the October 2003 issue of Kiplinger's, decided to freeze their plans when it realized their contribution would have to increase from $3 million to $9 million. This means employees' retirement benefits would freeze at their current levels, perhaps far short of the expectations of long-time employees who have five or more years until retirement. New employees would not be eligible for the pension plan. Hewlett-Packard, long considered one of the most employee-oriented places to work, is the latest in a long line of companies to recently freeze its pension plan. Other companies are continuing the trend of moving to 401(k) plans which places the responsibility for retirement plan squarely on the shoulders of the employees.

The message to employees is clear: when it comes to your retirement plan, keep your eyes wide open at all times, take nothing for granted; your retirement is your responsibility. You need to make prudent choices and avail yourselves of all the tools and potential safety nets at your disposal to keep your retirement plans on track.

Currently there is a great deal of talk in Congress as well as various government departments to devise solutions to the PBGC problem. The Bush Administration has proposed that PBGC member companies pay higher premiums into the fund to help reduce the deficit and enforce stricter rules for those companies whose balance sheets are less than favorable.

In the October 18 issue of Forbes, Douglas Elliott, president of the Center on Federal Financial Institutions, says, "Nobody wants the taxpayer to have to bail out the PBGC." Elliott estimates such a bailout would cost $92 billion today to prevent the fund from running out of cash in 2021. "But the worry is, if you do the things that would rescue the PBGC--raise premiums and toughen funding rules--you drive companies out of the system."


Things to know
If a company's pension plan becomes underfunded, employees must be notified in writing. Notification is triggered when the plan falls below the 80% threshold. Employees have also had the right to request information about their plan's status at any time from their plan administrator.

If you are not sure about your employer 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.