EDITOR'S NOTE: This article was originally published in the December 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.
A little more than a year ago, Kenneth Hollis took an offer of early retirement as a staff engineer for Delphi, a global producer of automotive parts in Troy, Mich. Hollis, then 54, figured he would take some time off and then perhaps get a part-time job once the economy recovered. Although Delphi had entered bankruptcy proceedings in 2005, he assumed his pension and other retirement benefits were safe.
But in April 2009, Delphi ended retiree health benefits and life insurance. Four months later, the Pension Benefit Guaranty Corp., a federal agency that insures pensions, took over Delphi's six plans covering 70,000 workers and retirees. Because the PBGC places caps on payouts, Hollis learned his monthly payment would be cut in half -- to $1,820 for his and his wife's lifetimes.
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Hollis worries that the reduced pension won't cover their expenses for the next three or four decades. "It just seems unfair," he says. "I played by the rules, and I did what I was supposed to do. I worked hard."
Hollis is among a growing legion of retirees who receive checks from the PBGC. During the 12 months ending September 30, the PBGC took over 144 pension plans (representing 1.48 million participants), up from 67 plans (1.27 million) the previous year.
The PBGC steps in to administer a plan that's underfunded, meaning the company lacks sufficient assets to pay promised benefits. In most cases, the PBGC takes over a plan when a company proves in bankruptcy court or to the PBGC that the employer cannot remain in business unless the plan is terminated. "There were increased bankruptcy filings, and bankruptcy filings often lead to PBGC takeovers," says Jeffrey Speicher, the agency's spokesperson.
A bankruptcy filing does not necessarily mean a pension plan will be terminated. However, "if your company goes into bankruptcy, that’s a big red flag," says Rebecca Davis, staff attorney for the Pension Rights Center, in Washington, D.C.
The PBGC pays benefits based on a formula that takes age into account. For 2009 and 2010, the PBGC pays a maximum of $4,500 a month to someone who starts taking a pension at age 65. Someone whose company promised $5,000 a month for retiring at age 65 would instead get a $4,500 payment. Because a majority of pension plans promise less than PBGC limits, 85% of pensioners have received their promised payout over the past 35 years, according to the PBGC.
PBGC's maximum payout increases for each year a person retires after 65. And it drops for each year a person retires before 65. For example, a 62-year-old is capped at $3,555 a month, and a 55-year-old is capped at $2,025. Payments are lower if the spouse is also getting a benefit.
For those who are already retired, caps are based on their age when the plan terminates or the employer goes into bankruptcy. Say a woman retired and started collecting a pension at age 55, and her plan terminates when she's 58. The $2,565 limit for a 58-year-old applies. If the retiree had been receiving a monthly check for $3,000, her pension will be reduced.
For current workers, pensions are capped according to the age they start taking the PBGC benefit. Say a worker is 63 years old when his plan terminates, and he's earned a monthly pension of $4,500 a month. If he retires, he could take a reduced amount of $3,870, according to the limit for a 63-year-old. Or he may choose to wait two years after retirement to collect his pension so he can take the full amount allowed for a 65-year-old for the year the plan was terminated.
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Hollis's benefit was reduced because of his age and because his wife was sharing the benefit. He and other salaried employees and retirees have filed a federal lawsuit against the PBGC, claiming that the agency did not have court approval to terminate Delphi's pension plans. Delphi had once been a unit of General Motors and was spun off in 1999. Hollis worked for both companies for a total of 32 years.
As part of the spinoff, GM had agreed to pay pension supplements, called top-ups, to Delphi's union retirees according to the complaint. These top-ups guaranteed union retirees their promised pension benefits. But GM did not promise supplements to salaried workers and retirees. The salaried retirees, says Hollis, "have not been given a haircut. We have been decapitated."
If the PBGC Steps In
When the PBGC takes over a plan, the agency notifies participants in a letter that their pension plan has been terminated and that the agency has become the plan trustee. The PBGC then reviews records to determine how much each person will receive.
Those already receiving a pension will continue to receive a payment without interruption. However, the payout could be reduced. If you retire before the PBGC makes a final decision, you will receive an estimated benefit. It takes an average of three years for the PBGC to calculate final benefits. The agency does not pay out a lump sum, just monthly payouts.
A U.S. Government Accountability Office report this fall found that long delays and uncertainty over the final benefit amount make it difficult for workers to plan for retirement. The GAO also noted that retirees become accustomed to a certain level of income.
If you retire after the agency takes over your plan, you need to apply to the PBGC to begin payments. About four months before you’re ready to collect your pension, call the PBGC at 800-400-7242. Also, check its Web site (www.pbgc.gov) for details on benefit levels and to find information on your specific plan.
You can appeal if you disagree with your final benefit. Your written appeal must be submitted within 45 days of the date of the formal determination letter informing you of your benefit. If you need more time, you can request an extension.
If you're concerned that your plan could be underfunded and the PBGC might step in, you can read the funding notice that your plan administrator is required to provide annually. You can also request funding information from your plan administrator.
Once the PBGC steps in, try to put more money into a 401(k) or IRA. "If your employer has a 401(k), now is the time to start contributing more. You won't have any more money coming into your pension," says Jack VanDerhei, research director at the Employee Benefit Research Institute.
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