Pension Guarantees

The July AARP Bulletin has an article titled What an Outrage Protector of Pensions on Shaky Ground. This week on CNBC, the Ohio State Attorney General talked about the reasoning for filing a lawsuit against BP and has filed lawsuits in the past against other publicly traded company that saw a dramatic drop in stock price. These are related in that it points to the efforts taken to guarantee a pension. When person receives a pension it is believed to be guaranteed. This is mostly correct and if you are receiving a pension you need to stay current on the status of the pension fund.

Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2009). The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.

The PBGC is not funded by general tax revenues. Its funds come from four sources:
1) Insurance premiums paid by sponsors of defined benefit pension plans;
2) Assets held by the pension plans it takes over;
3) Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates;
4) Investment income.

Currently PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people. It currently protects the pensions of more than 44 million American workers and retirees in more than 29,000 private single-employer and multiemployer defined benefit pension plans.

The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds. Under new leadership, the agency shifted a substantial portion of its assets into stocks. Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.

The AARP article made the following statements about PBGC:
* did not effectively safeguard assets
* problem with compliance to laws and regulations
* chronically underfunded with shortfalls in the billions of dollars
* this impacts the pensions in 1 out of 6 Americans

Getting to the questions of why the Ohio Attorney General has filed lawsuits against BP, Bank of America, AIG, etc? The answer is that management company for the Ohio state employees pension fund took some risks in order to gain a higher return and invested in individual stocks at a time when certain individual stocks took a dive. Because this pension fund is now underfunded, the citizens in the state of Ohio now have a liability at a time when tax receipts are down. The lawsuits are filed to protect because of: mismanagement, being underfunded, and a liability when tax receipts are down.

It seems that PBGC and Ohio state pension fund have some similarities. Typically, pension funds for corporations are underfunded because corporations prefer to put money into the operation of the company instead of a pension fund. Because of the recent decline in the stock market, both public and private pension funds need the PBGC more than ever.

Bottom Line: Pensions are a great thing and realize that a risk of underfunding always exists, especially when a stock market declines. If you have a pension you need to stay current on the funding and performance. Also, even if you will be covered by a pension you need to also invest for retirement because things outside of your control influence the ability of the pension fund to meet its future obligations.