Reports of the death of the traditional pension, as with concerns about Social Security, have been greatly exaggerated, to borrow Mark Twain’s famous phrase.
There is no question that defined benefit plans are disappearing from the workplace. Nor that pensions, particularly public pensions, are under pressure.
Employers are scrambling to adequately fund their plans and are also watching plan returns slide after finally regaining much of the losses they experienced during the 2007-2008 market swoon.
But pension benefits are generally not at risk, experts stress, particularly for existing employees who already have vested benefits from their plans. More likely, newer employees will receive less generous benefits and may have to contribute more to their plan than existing employees to secure benefits.
“Don’t panic just because there’s generally bad news about the economy or Wall Street,” advises Rebecca Davis with the Pension Rights centre, a pro-employee consumer group. “It doesn’t mean your plan is in trouble.”
“The one big data point that everyone likes to look at is the funded status of the plan,” says Ilana Boivie, program director at the National Institute on Retirement Security, which focuses on public employee pension plans. The funded status, she explains, is the ratio of assets that a plan has on hand to meet its future pension obligations. This assumes those assets actually earn the future investment returns assumed by plan administrators. These assumptions have drawn more scrutiny in the wake of steep market losses in recent years.
“A funded ratio of 80 per cent or higher means that the plan is healthy,” Boivie says. Because of the long time horizon of plan investments and retiree payouts, any gap between 80 and 100 per cent is considered manageable, she explains, although higher-funded ratios are desirable.
Current and retired pension plan participants can get annual reports about the financial conditions of their plans. In the case of private plans, the annual funding notice is legally required, Davis says.
Participants also can request a more detailed annual report from their plan, she says. It goes into greater detail about financial conditions of the plan, and may require the help of a financial adviser to evaluate.
Davis also advises active employees to get a statement from their plan showing the vested retirement benefits they are entitled to receive when they retire. Once a benefit is vested, she notes, the plan is legally obligated to pay it. “What I think no one would argue,” Boivie says, “is that any benefits you’ve accrued to date will not be taken away from you. You will get your vested benefits in retirement.”
Even employees in troubled private plans with low funding ratios should have some comfort that they will see those vested benefits when they retire, Davis adds. In the case of private plans, the federal Pension Benefit Guaranty Corp. (PBGC) insures pension benefits, and its maximum benefit payouts are more than $50,000—well above the typical pension due to retirees.
Employees worried about the long-term solvency of their plan are often tempted to take their pensions as lump-sum payments instead of lifetime monthly payments, figuring it’s better to get the money now than worry about it being there in the future. Most experts say it’s much better for retirement security to lock into lifetime monthly payments. For private plans insured by the PBGC, taking lump-sum payments shouldn’t be necessary for most employees to receive their vested benefits.
Public employee pension plans do not have insurance, and Boivie says it’s much more important to drill down into the details of each plan to evaluate its health. “These plans, because they are public entities, pretty much operate in a fishbowl” and provide lots of information to participants and taxpayers. Larger public plans are part of the Public Funds Survey, which tracks the performance of plans providing pensions to more than 80 per cent of all public employees. (User registration is required to access the Survey’s reports.)
“Just about every state and local plan publishes a comprehensive annual financial report,” she says. Boivie recommends that public pension-plan members look at their employer’s plan contributions over time. Every year, plan actuaries have to develop a set of plan assumptions for contributions, investment earnings, and plan expenses. These assumptions are the basis for the plan’s annual required contributions, Boivie explains, and the annual financial report will show the percentage of the annual required contribution made by the plan.
While there have been concerns about government funding shortfalls, the biggest concerns about public pensions have been over program cutbacks to new employees, and the meagerness of payouts for short-time public employees who don’t accrue large vested benefits. For those employees, Boivie suggests, it may make sense to put more money into individual retirement accounts and public defined contribution plans, such as 403(b) programs.