Lawyers.com > Understand Your Legal Issue > Employee Benefits > Pension and Profit Sharing Plans > Market Woes May Spell Trouble for PBGC

With the economy struggling and financial markets hard-hit, the last thing that Americans want to worry about is their pension plans.

Yet, the Government Accountability Office (GAO) is worried, and therefore Americans should be worried as well. In January 2009, the GAO decided to keep the Pension Benefit Guaranty Corporation (PBGC) on its "high-risk" watch list for 2009¹. This is the seventh year that the PBGC has been on that list. The PBGC isn't currently in crisis, but the pension plans of future retirees may be at risk.

The Pension Benefit Guaranty Corporation's Role

The PBGC is a little-known agency of the federal government. Created by Congress as part of ERISA in 1974, the PBGC insures the private pension plans of 44 million Americans. These "defined-benefit" pension plans provide a specified monthly benefit at retirement. This is unlike 401(k)-type retirement plans, which require employee contributions and require employees to bear some of the investment risk.

The PBGC's ability to do its job of insuring these pension plans depends upon the performance of its investments, as well as the funding and solvency of large private pension plans. If the market performs poorly, or the PBGC is required to take over very large pension plans that have failed, the PBGC could need a bailout in the future. And that would be very bad news for taxpayers and employees.

What is the Problem?

The PBGC insures numerous private pension plans. It also serves as trustee for many plans that have already ended. Its assets, therefore, must be sufficient to "cover" the number of plans and retirees that require payment now, and may require payment in the future. According to its Annual Report², the PBGC had assets totaling $63 billion in 2008. It also made huge strides in 2008 by decreasing its deficit to $11.2 billion. At the end of fiscal year 2007, the deficit was reported to be $14.1 billion.

However, the Annual Report didn't cover the entire 2008 calendar year. Instead, the PBGC's fiscal year ended on September 30. Market activity after that date wasn't accounted for in the 2008 report. Most of the stock market's decline happened during the last quarter of 2008 and the first quarter of 2009. As a result, the numbers in the 2008 Annual Report most likely do not reflect the actual condition of the PBGC's current investments.

How Does This Affect Me?

The PBGC insures some of the largest pension plans in the nation. Some of these plans are well-funded for the near term but underfunded for future employees. For example, Detroit auto manufacturers like General Motors Corporation operate huge pension plans. If the PBGC is required to take over the pension plan of General Motors, its current $11.2 billion deficit could double.

How Can I Protect Myself?

If the PBGC is required to take over large pension plans in the coming years, a taxpayer bailout may be the only solution to the immediate problem. However, individual employees can reduce their retirement risk by taking the following steps:

1. Consult an attorney to determine if you have a defined-benefit pension plan. 401(k) plans and other newer types of retirement plans don't face the same funding issues that defined-benefit pension plans face. This is because the employee takes risk. Even in down-markets, it might be wise to continue contributing to other retirement accounts.
2. If you have a defined-benefit pension plan, don't rely solely upon that plan for retirement. If the pension crisis deepens, future pension payments could be reduced or not made. Employees only with pension plans should consider funding other types of retirement plans, such as IRAs. Having a variety of investments in place can protect your future if one type of plan fails.
3. Find a good financial advisor. A financial advisor can assist with retirement planning. A financial advisor can recommend specific retirement planning vehicles that will be best for your particular situation. This can be helpful when deciding how much to invest, and in what kind of plan that takes into account your personal situation, including how long you have until retirement.
4. Follow the progress of the PBGC. Keeping informed can help you to plan for the future. All taxpayers are affected if the PBGC fails or needs a future bailout.

The PBGC is not immediately at risk for failure. Future improvements in pension plan oversight and management may improve the outlook of the PBGC. Even though you may have a pension plan now, you always need to stay informed about your options and make changes that will improve your retirement outlook and protect your financial future.

Sources:

¹Doug Halonen, "PBGC on Government Watch List for Seventh Straight Year," Financialweek.com, January 28, 2009, http://www.financialweek.com/apps/pbcs.dll/article?AID=/20090128/REG/901289982/1038/EXCLUSIVES, accessed March 31, 2009.
²Pension Benefit Guaranty Corporation, PBGC 2008 Annual Report, http://www.pbgc.org/docs/2008_annual_report.pdf, accessed March 31, 2009.

Questions for Your Attorney

• Does the PBGC fully insure pension benefits, or is there a limit on how much an individual employee can receive if the PBGC takes over an employer's failed pension plan?
• When the PBGC takes over a pension plan, are current retirees treated differently than plan participants who are still working? Are benefits ever reduced for future retirees?
• How well-regulated are private pension plans? How do I find out how my employer's pension plan is performing and whether or not it's at risk for failure?

Related Resources on Lawyers.com^sm

- Pension and Profit-Sharing Plans
- Taxation: Pensions and Annuities FAQ
- The Pension Protection Act of 2006
- Find an Employee Benefits Law lawyer in your area
- Visit the Employment Law for Employees message boards for more help