Pension Pains: What if Auto Companies Go Bankrupt?

Pension plans pool together the retirement savings of an entire company's workforce, young and old. The employer sets aside an amount of cash each pay period, based on a percentage of each worker's salary.

The percentage is set by how long the average worker is expected to live, what kind of return the company hopes to get on its investments and on how large of a payout the company plans to make at retirement.

It all gets invested and is eventually used to make payments to workers once they retire.

Freezing Pensions

Many companies are deciding to freeze those pensions now in order to save money in the long-run. Employees get credit for their time already served but won't get any additional credits. That can really hurt employees who are close to retirement but not quite there, because pension plans tend to give more generous benefits for the later years of service.

For instance, one employee might have planned on staying with a company for 30 years, only for it to freeze the pension during their 25th year. The employee would still get credit for those 25 years of work, but it's really those last five years that push up the value of the pension.

Employers Cut Off Pension Plan Accumulation

Olivia S. Mitchell, executive director of the Wharton School's Pension Research Council at the University of Pennsylvania, has been watching companies scaling back.

She said roughly $2 trillion has been lost in 401(k)s and pension plans during the recession.

"Plan sponsors are going to have to start contributing more to back the promises they've already made," Mitchell said. "Corporate plan sponsors are looking very hard at whether they can reduce future benefit accruals."

Companies can't touch the benefits workers already received, but nothing stops them from ending their pension plans in the immediate future.

Peter Austin, executive director of Bank of New York Mellon Pension Services, said that many companies are forced to make higher contributions to their pension plans because the value of their portfolios plunged.

But he said that while bankruptcy is never a good thing, "the sky's not falling." He said the plans are set up in a way that even if a company collapses, workers are safe from losses.

"Even in the worst case of bankruptcy," he said, "their benefits will be protected."

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