Next Recession Victim: Your Pension and Retirement Plan

March 30, 2009— -- As if there weren't already plenty of economic gloom and doom these days, now some U.S. workers are apparently starting to worry about the safety of their pensions.

Cash-strapped companies are cutting back everywhere possible, and one target has been retirement plans. With the stock market down, companies have been forced to contribute more money to their plans in order to keep them fully funded. Several are deciding instead to end future contributions to the programs.

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Another set of workers has another concern: Their companies have gone into bankruptcy. Pensions are insured through the Pension Benefit Guaranty Corp., a creation of the Employee Retirement Income Security Act of 1974. But there are limits to the insurance, now $54,000 a year for workers who retire at age 65. Younger retirees receive less.

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Raul Miller, a 55-year-old flight attendant for United Airlines, had expected to retire this year after 36 years with the company. But when the airline emerged from bankruptcy in 2007, his pension was a lot less than what he had planned.

"It's was sustainable enough to begin with," Miller said. Now that the pension has been cut, though, "it means that I cannot retire. It means that I have to continue working as long as I have expenses."

Miller said he pays more today for food, gas and countless other daily living expenses.

"While everything else is going up, our pension is going down," he said. "My pension is not going to be substantial enough. I'm going to have to have a full time job."

Like many other workers, Miller had taken his job expecting and planning on having a pension.

"I was working hard and loyally for this company and one of the reasons was, one of the things I was looking forward to, was the security of a pension in my retirement," he added. "It's just not happening the way I anticipated."

Even if your company doesn't go bankrupt, you might not get the pension you once thought you would. About one-third of employees nationwide participate in a traditional or defined benefit pension plan.

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.

Peter Austin, executive director of Bank of New York Mellon Pension Services, said that many companies are forced to make higher contributions because the value of their pension portfolios plunged. To make matters worse, a lot of companies can't borrow cash to add to the fund because of the credit crisis.

"It's probably the perfect storm for these pension plans," Austin said.

Austin said many of his corporate clients are now considering other options, including freezing their plans. Many are switching over to a defined contribution plan, such as a 401(k) instead of a pension.

But he cautioned 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."

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

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.

Underfunded Plans

Newhouse Newspapers, for instance, is cutting pension contributions and shifting to a 401(k) program. Cell phone maker Motorola suspending its contributions in December.

Then there is a final group of companies, who have seen their funding drop so low that they are required by the federal Pension Protection Act of 2006 to make changes to their plans.

For instance, book publisher Houghton-Mifflin Harcourt notified its employees last week that they will no longer be able to take a lump-sum payment at retirement, according to spokesman Joe Blumenfeld. Employees instead will have to either take traditional monthly payments or can chose to get half of the lump-sum payment and the rest through monthly payments.

Blumenfeld said the plan fell below the 80 percent funding level and the company, by law, had no choice but to make the change.

"There wasn't a great uproar about it," he said, but many were asking: "Who has a defined pension anymore, anyway."