Rushin’ Headlong

It’s time to take on the somewhat controversial topic of the PBGC. I touched upon it already in several previous posts. In fact, I mentioned it as early as Part 1 of the Pension Series, and as recently as Post 14. Yet, I never tackled it head-on; so it feels like I’m overdue for an article on the PBGC specifically. I was half-hoping someone in my Facebook Group had experience with it because primary sources are always best when researching a topic. However, given the typical conditions attached to the PBGC’s intervention in a pension fund, it’s better that no one has.

Now, for those of you who are thinking, “PBGC? WTF is the PBGC?”, I hear you. I departed from my typical pattern with this post. Normally I warm up my audience with a nice long intro that culminates in an explanation of the topic at hand. However, I dispensed with the niceties this time. With that said, it’s probably best if I at least explain what the PBGC is for anyone who doesn’t know or doesn’t remember.

What Is The Pension Benefit Guarantee Corporation (PBGC)?

The Employee Retirement Income Security Act of 1974 (ERISA) created the PBGC. The PBGC is a U.S. government-backed, but privately funded, insurance scheme that acts as the guarantor of last resort for two specific types of defined benefit pension plans: multi-employer and single employer plans. As I noted in Part 14 of the Pension Series, the PBGC’s Single-Employer Program (SEP) provides insurance coverage for corporate pension plans owned by a single company. The Multi-Employer Program (MEP) covers collectively bargained pensions “maintained by more than one employer, usually within the same or related industries, and a labor union“.

Each program has a separate fund within the PBGC, and believe it or not, their fates are not intertwined. According to the PBGC itself, the SEP is close to full solvency; while the MEP is less than 10 years from insolvency. The solvency of the PBGC’s two programs is an issue that’s reported on routinely in the parts of the financial press that covers pensions.

Why is the PBGC’s fiscal health important? Or more specifically, why is it important to someone facing a Golden Albatross decision point? Simple. If the PBGC is the ultimate guarantor of person’s pension, and that person is on the fence as to whether or not pursuing the pension is “worth it“; then determining the likelihood of a PBGC intervention could be an important decision factor. Alternatively, someone facing a pension lump sum decision might want to determine the likelihood of the PBGC’s intervention at some future point as an aid in their decision-making process.

PBGC Intervention: MEP

Either way, PBGC intervention isn’t a good thing. As I mentioned in Parts 1 and 14 of the Pension Series when the PBGC intervenes it doesn’t guarantee the full amount of person’s pension, only a percentage. In fact, if the PBGC intervenes in a multi-employer plan via the MEP, it may currently pay out as little as $1,320 annually of someone’s total guaranteed pension amount. As the 2017 Projections Report summarizes in the FAQs:

• PBGC’s multiemployer guarantee program is complicated and difficult to summarize quickly. The guarantee sometimes is summarized as a maximum guarantee amount of $12,870 per year (payments are made monthly).
  • But that is only a special case of the guarantee; it applies to people who worked exactly 30 years in jobs covered by the plan and have a moderately high promised benefit.
• If a person has:
  • 10 years of service – PBGC’s guarantee covers a benefit of up to $1,320 and partially covers benefits in excess of that level but cannot exceed $4,290 per year.
  • 20 years of service – PBGC’s guarantee covers a benefit of up to $2,640 and partially covers benefits in excess of that level but cannot exceed $8,580 per year.
  • 30 years of service – PBGC’s guarantee covers a benefit of up to $3,960 and partially covers benefits in excess of that level but cannot exceed $12,870 per year.

OUCH! Although any of those totals are better than outright plan failure; they’re all seriously demoralizing sums. I don’t see how someone already living on a pension (and therefore a fixed income) in retirement survives a benefit cut of that magnitude. I failed to mention those payouts don’t include a cost of living or inflation adjustment either!

Thus, I think it goes without saying that the MEP is in bad shape. That said, the U.S. Congress is currently holding joint House and Senate hearings on the future of the MEP. As I stated in Part 14 of the Pension Series though, I’m not hopeful they’ll find a solution. As a result, if a person is in a multi-employer plan, and knows it’s facing dire financial straits, they should give serious consideration to the likelihood and effects of plan failure and intervention by the PBGC’s MEP.

PBGC Intervention: SEP

The fiscal news is way better on the SEP side. Although the SEP doesn’t cover 100% of a person’s guaranteed pension, it covers a much larger percentage than the MEP. Again, as the PBGC’s 2017 Projections Report states in its FAQs:

The single-employer benefit guarantee for a plan participant also depends on the age when he or she begins receiving payments from PBGC and the form of payment he or she elects.

• For 2016 terminations, the guarantee can cover all or most of a 65-year-old retiree’s benefit up to $60,136 per year.
• The guarantee is lower if a retiree begins receiving pension payments from PBGC before age 65 or if the pension includes benefits for a surviving spouse or other beneficiary.
• The guarantee can be higher if a retiree begins receiving payments from PBGC after age 65.

For more details on maximum SEP payouts, see the PBGC’s Maximum Monthly Guarantee Tables.

The SEP’s reduction to the top payout of $60K a year is not the stake through the heart of a retirement budget like the MEP’s top payout of $12K. However, that might still represent a significant reduction in retirement income. As a result, it’s just as important for a participant in a SEP covered company plan to determine the likelihood of intervention.

The Odds of Intervention

What are the odds that the PBGC might take over a participant’s pension fund? That’s a great question with several different parts to consider when answering. For instance, it’s important to remember the PBGC only covers private pensions. The PBGC doesn’t cover the multitude of public pensions that exist at the Federal, State and local government levels in the U.S. Thus, a person only need factor for plan failure and PBGC intervention if they are a participant in either a multi-employer or a single employer plan that pays dues to the PBGC — which not all do.

Also, the PBGC only intervenes when a participating pension fund in the MEP or SEP runs out of money. I discussed methods for determining whether or not a pension fund is under financial duress in Part 1 of the Pension Series, so I don’t feel compelled to repeat the same information here. If you haven’t read it, I recommend you go to that article for my in-depth analysis. That said, I wrote that article on Labor Day Weekend 2017. Believe it or not, there’s been a lot of movement on the stability of U.S. pension funds since then, especially given the  December 2017 tax-cuts and the rising interest rate environment. Thus, here are a few more recent articles worth noting that supplement the information I provided in my pension safety article:

• An Unintended Consequence of the GOP Tax Law: Bigger Pensions for Some — Marketplace.org
• Milliman analysis shows multiemployer pension funded status improves during 2017 — Milliman.com
• Multiemployer Pension Plans: Current Status and Future Trends — Center for Retirement Research Boston College
• Pension Funding Index May 2018 — Milliman.com
• Corporate Pension Funding Study (2018) – Milliman.com
• HIGH-RISK SERIES: Progress on Many High-Risk Areas, While Substantial Efforts Needed on Others — Government Accountability Office (2017, Pg 609)

By The Numbers

The odds of intervention also depend on whether or not a pension fund is covered by the PBGC. Thus, it’s important to understand how many participants and plans the PBGC covers. Let’s break down the numbers by type of pension. I’ll start with the MEP.

According to the PBGC’s website, the MEP covers approximately 1400 pension plans with 10 million participants. Numbers don’t tell the entire story though, because some industries are more likely than others to fall under a multi-employer pension scheme. This includes the construction industry; retail trade and service industries; manufacturing; mining; trucking and transportation industries; and entertainment (film, television, and theater). As stated above, these are mostly union pensions, but only unions within corporate America. Think of your local International Brotherhood of Electrical Workers (IBEW), or an organization along those lines. You can find the entire list of multi-employer pension funds covered under the MEP here.

The SEP covers far more workers and funds than the MEP — which is good news since the SEP is the better-funded program. In all, the SEP protects “about 30 million workers and retirees in over 22,000 pension plans“. Given the larger nature of the SEP, there is less cohesion in the types of industries it covers. It covers pension funds with as few as 1 participant and as many as 226,000 (FedEx). The oldest active effective date for a fund dates back to 1903 (The Boston Symphony); while the most recent effective dates from 2017 include companies such as General Dynamics and Ernst&Young. The entire SEP participant list can be found here.

Top End of the Scale

What should a person with a pension covered by the PBGC ultimately do? I find that lighting my hair on fire and running around in my underwear helps. Just kidding … I rarely run these days. Besides, no one, not even Mrs. Grumpus, likes seeing me in my underwear. In reality, I don’t think panicking will help much.

As a first step, I strongly recommend that people educate themselves on both the type of pension plan they participate in (or receive payments from) and it’s fiscal health. No matter what, that information will serve a person well. Doing so will also help a person plot out where their pension ranks on a scale of what I consider well-off to insecure. Once a person determines where their pension lies on this scale, then they can decide what to do.

Ideally, a person researching their pension fund discovers that it’s not only covered by the SEP but also robustly funded (over 100%). In other words, the pension fund is unlikely to need a bailout, but if it ever does, it can rely on the PBGC’s better managed and better-run program as a back-up. Any pension fitting this description is well-off in my (non-professional) opinion.

Walking down that scale a wee-bit, the next best answer is that a person participates in a robustly funded multi-employer plan. This means it will, hopefully, never need to rely on the PBGC’s MEP. Some signs for a plan such as this include future obligations funded at 100% or more; and growing participant membership (as opposed to declining membership). Unfortunately, this doesn’t fit the description of too many multi-employer plans these days, but there are some. As the McMillan multi-employer plan study linked above shows, 372 multi-employer pensions are above 100% funded. I would consider someone with a pension in this situation on the “good” range of the scale.

The Middle

I place single employer plans funded close to 80%, but covered by the PBGC, on the “OK to not-so-great” part of my scale. In truth, there are several different fates for a plan in this situation; most of which depend on the corporation funding it. If the corporation is in good fiscal health, but simply chose to under-fund the pension, then it could inject enough money to bring the fund back to health. Alternatively, it could choose to transfer the risk associated with that pension plan to an insurance company as I described in Part 14 of the Pension Series. In conjunction with that, or separate from it, a corporation may choose to transfer the risk to plan participants through lump-sum offers. Finally, it could choose to freeze the plan, pay back those who haven’t vested, and freeze the amount owed to participants who have vested.

A corporation struggling fiscally won’t have the same options as one that isn’t. Freezing a pension fund is usually a good sign that something is wrong since it’s one of the few options available to stop incurring future liability. Voluntarily terminating the plan is also an option if the company can produce enough money to pay everyone lump sums. Whatever, the case may be, any plan under 80% funded with a fiscally challenged corporation backing it, plots out in the “not-so-great” part of my scale. I say this since the SEP does not guarantee full percentages of a person’s pension when it steps in.

The Bottom End

Underfunded (<80%) multi-employer pensions covered by the MEP are the primary pensions that reside in the “insecure” category on my scale. It’s no secret that union membership is on the decline in most parts of the U.S. Thus, it’s extremely difficult for multi-employer plans to recover once they fall behind on their funding levels because there are typically fewer participants signing up to the plans, than retiring from them. As the Baby Boom generation continues to retire, more and more active contributors (workers) shift into the retiree category. This demographic inevitability places so much financial pressure on underfunded pensions that it creates a death spiral.

As previously noted, no one with a pension in this category should expect anything near their full pension if the MEP steps in. In reality, a person would know much sooner that something’s afoot. The Multi-employer Pension Reform Act of 2014 (MPRA) “provided severely underfunded plans, under certain conditions and only with the approval of federal regulators, the option to reduce the retirement benefits of current retirees to avoid plan insolvency.”. Thus, if pensioners in the plan start receiving smaller payments, insolvency is a real threat.

The “Oh Shit” Category

There is one category that plots below the bottom-end of the scale. That is the category for pensioners who find themselves already receiving payments from a MEP-backed multi-employer pension fund in a death spiral. I call this the “oh shit” category. That’s not a joke either. For anyone in this situation, MEP intervention is only a matter of time, which means major cuts in pension sizes are on their way. I would strongly advise anyone stuck in this situation to prepare for a sizeable scale-back in the size of their annual pension at some point in the near future.

The problem is that options are limited for current pensioners whose pension makes up a large percentage of their annual retirement income. There’s no easy way to replace one leg from the three-legged retirement stool (SS, Pension, Savings) when a retiree is already standing on it. Assuming they are over Social Security age, it’s not like they can just run out and get a job to make-up for lost pay — even if they wanted to. They may have a home they can sell or reverse mortgage; and if they have a family, they may be able to move in with them. After that options get a lot riskier and unpleasant. If you have family members already living on a pension, it may behoove you to look into whether or not it falls into the “oh shit” category.

What to Do, Golden Albatross?

What should a person caught in the maw of a Golden Albatross inflection point do with all this information about the PBGC? Like all things related to personal finance, it’s completely situational dependent. If a person is unhappy at his/her job, years away from vesting in the pension, and discovers their plan is in the MEP; the information in this article may provide the prompt they need to seek out a new job. On the other hand, if a person is unhappy in a job but close to their pension point in a well-funded plan covered by the SEP; this information may give them a reason to stay. Of course, there is a scale in between those two points, where the information may not prove useful at all. Thus, this information is simply one more data point for a person to use in order to make a well-informed pension decision.