You paid into a pension system. It will pay out for you … right?
As illustrated by Detroit’s municipal bankruptcy and the threatened implosion of its pension plans, not to mention routine corporate bankruptcies, pensions can’t be taken for granted.
That’s why it’s smart to set up a system for monitoring the fiscal health of a pension you are counting on. Pension system analysts say an annual review is usually sufficient. So many warning bells are required to go off before a pension goes over a cliff that reviewing statements, announcements and projections once a year will likely signal a problem in time for you to pull in for a closer look. Of course, you’ll open and read any statements as you receive them, but assembling the big-picture view doesn’t have to be an ongoing chore unless your pension is actively threatened.
Public and private pensions fall under different regulations, so your first priority is sorting out how many pensions you might have coming your way and from where.
Ellen Bruce, director of the Pension Action Center at the University of Massachusetts–Boston, explains that private employer defined-benefit plans are required to publish data about their ability to pay those pensions, which is called the “annual funding notice.” The Pension Action Center offers free technical help for navigating pension reports and rights to residents of New England and Illinois.
Federal law also requires private defined-benefit pensions to participate in the Pension Benefit Guaranty Corporation’s insurance plan and to comply with its regulations. The PBGC reported in November 2013 that its own deficit hit $36 billion, mainly because some plans aren’t keeping pace with the amount they will eventually owe retirees – thus increasing the chance that the PBGC will have to pitch in.
While the PBGC and the plans wrestle with their fiscal difficulties, your task is to make sure you are collecting the information you need on the pensions you are counting on. The plan administrators must send you regular updates on the fiscal situation or furnish those updates on request, Bruce says.
One caveat, she notes: If you have had several employers, you might have overlooked some of the plans you are part of – both traditional pensions and self-managed plans, such as 401(k)s. “Plans lose track of people, and people lose track of plans,” Bruce says.
The Pension Rights Center, a watchdog nonprofit, offers several tip sheets for monitoring private pensions, including one on funding notices and another on how to set up a system for tracking your pensions.
Its communications director, Nancy Hwa, recommends that you also monitor several key indicators that could presage the health of your pension plans.
The first indicator is how the companies are doing overall. Companies in financial distress are more likely to jettison pension plans.
Secondly, track trends in your industry. “If other employers in your industry are cutting back on pensions, there might be reason to be concerned,” Hwa says. “Even if your plan is healthy, there’s a ‘follow the leader’ mentality, and if a major employer freezes its plan, it sets a bad precedent.”
One trend is “de-risking,” in which a company offers its retirees lump-sum buyouts so the company can minimize its future responsibility. If this seems likely, think through the implications for your financial security. “For most people, sticking with a monthly guaranteed payment is better,” Hwa says.
If your plan is teetering, regulations require the plan administrator to notify you of the “intent to terminate” at least 60 days before the proposed termination date. In some cases, the crumbling pension is converted to annuities through insurance companies.
Bruce recommends pulling together pension information from all your past and current employers, so you can be sure to tap into all the income due you. Top priorities: the plan’s summary plan description, deferred vested notice statements for past positions, benefit statements and proof that you’ve held the jobs.
The PBGC itself provides information on defined-benefit plans it has taken over and now oversees. At the PBGC website, you can:
• Check on the existence or health of a private pension plan.
• Review reports about the financial health of a private pension plan – and if it is underfunded, what its managers are doing to restore it to health.
• Get an estimate as to what your income might be from a plan.
• Find out what your options are if a plan you are vested in is managed by the PBGC.
• Find out how to appeal a decision about your eligibility for a pension.
What if you have worked for a local, state or federal government for part or all of your career? The process of tracking the future of your pension is different. “In the private sector, you get a letter from a government agency if the fund has much lower assets than liabilities – in other words, is thought to be in trouble – but in the public sector, there isn’t that law requiring that information, which, frankly, may not be that helpful,” says Teresa Ghilarducci, chair of the economics department and director of the Schwartz Center For Economic Policy Analysis at the New School for Social Research.
You must piece together information from reports generated by watchdog groups and the governments themselves.
The Pew Charitable Trusts support an ongoing project that analyzes the fiscal status of municipal and state pension plans. Its latest research, released Jan. 15, found that 61 U.S. cities have a cumulative shortfall of $217 billion between what retirees are promised and what the cities can actually pay. If your state is having significant pension tensions, track the situation through the State Budget Crisis Task Force, which reports on long-term fiscal responsibility in six states (California, Illinois, New Jersey, New York, Texas and Virginia) experiencing significant challenges. It outlines tactics that all states can adopt to ensure they can meet their public pension obligations. Getting familiar with pension concepts, such as “reserve funds,” can help you follow public debate about how pensions are managed in your state.
The key number to track, Ghilarducci says, is the “funded status,” also called the “funded pension ratio,” which is the pension fund’s liabilities over its assets. “You’re looking for it to be a 1-to-1 ratio,” she says. That means the fund already has the amount it owes (typically for the next 25 years).
Good and bad investment cycles can push that ratio up or down, she notes. “If it’s less than 1 to 1, the question is how much below, for how long and what is the plan doing about it?” Ghilarducci says. Good years offset bad years, so “Nobody gets excited unless it drops below 75 percent for a number of years.”
“Most people will be reassured when they look at this,” Ghilarducci says. “Most of the funds are in pretty good shape. It’s more important on a personal finance basis to make sure that you are contributing the maximum to your retirement funds overall.”
Source: US News