Over the last few years we’ve heard about the financial difficulties facing many public and private pension plans.
United Airlines declared bankruptcy in 2002 and a federal judge ruled that the airline’s four pension plans could be turned over the Pension Benefit Guaranty Corporation (PBGC), the government’s backstop for private pension plans. Beneficiaries continued to receive their benefits, but some higher salaried employees saw their monthly payments reduced based on the limits of PBGC coverage.
Several years ago, the city of Detroit filed for bankruptcy. Among the casualties were recipients of pensions from various city departments. The reductions in their monthly benefit checks varied, but the cuts were widespread. Other underfunded state and municipal pension funds are feeling the pinch, case in point is the state of Illinois and the city of Chicago teacher’s pension.
Here in Kansas, the KPERS system has been in the news with its funding issues.
Here’s what you need to know about your pension’s safety.
Who stands behind my pension?
Pension obligations are a liability of private sector employers who offer them. This is no different than with a bank loan or with bonds issued by the company. Failure to make good on their pension obligations can force a company into bankruptcy.
For private sector pensions for companies such as Westar Energy, Goodyear Tire, and Blue Cross, Blue Shield of Kansas the backstop should something happen is the PBGC. Should a private employer be unable to make good on its pension obligation, in most cases the Pension Benefit Guarantee Corporation (PBGC), an independent governmental agency, will step in and cover the pension obligations of the company up to their limits. The maximum benefit they will guarantee depends upon the year in which the plan was terminated and your age among other factors.
QUICK STAT: In 2016, the Pension Benefit Guaranty Corporation (PBGC) paid $45,602,854 to 5,651 Kansas retirees in failed plans. (Source: PBGC)
For state and municipal pensions, such as KPERS, it is typically the entity and the taxpayers who ultimately are responsible for making good on the pension obligation. City, county, school, fire, police, and state employees are among those covered by KPERS.
A 2013 article in Think Advisor using data from the Standard and Poors and Fitch rating agencies compiled by CNBC, ranked Kansas in a tie for the 6th worst funded status for it pension plan among all 50 states. This isn’t to say that anyone entitled to a pension won’t receive it, but this is certainly a motivating force behind pension legislation and other proposed adjustments that we’ve all seen in the news over the past couple of years.
Source: State Data Lab (Click to view your state)
Considerations in taking your pension
When the time comes to take your pension benefit, you will have a number of options to choose from. These options will differ from plan to plan, but here are some common choices.
Annuitize. This means taking your benefit as a monthly payment. A single life annuity generally results in the largest benefit. The downside is that all payments cease when you die, your family members receive nothing. A joint and survivor annuity allows your beneficiary (usually a spouse) to receive a percentage of your benefit should you die first, though your benefit will be lower due to the added coverage for your spouse.
Lump-sum payment. Many pensions offer an option to receive a one-time lump-sum payout based upon the amount of your pension. The lump-sum can then be rolled over to an IRA account and invested for your retirement.
In both cases your benefit will be based upon factors like your age, years of service, career earnings, and any other factors used in your employer’s pension formula.
Deciding which option is right for you can be complicated. There are financial considerations. Can you manage a lump-sum payment? Does the monthly payment option provide a level of comfort?
Increasingly a consideration surrounds the safety of your pension. If you work for a private company, is the company financially stable? Do they seem to be on the road to financial difficulties?
If you are covered by a state or municipal pension, concerns about funding and the financial health of the state or municipality are a factor to consider.
It can be beneficial to engage the services of a fee-only financial advisor to help you make the important decision of how to best utilize your pension benefit. The advisor can help you look at the pros and cons of the various options available to you in the overall context of your retirement planning.
I am experienced in helping people maximize their pensions and deciding the best option for their situation. If you have questions regarding your pension options, give me a call at (785) 256-9150 or schedule your free initial consultation here. I am a fee-only CERTIFIED FINANCIAL PLANNER™ practitioner that specializes in financial planning for retirees and those approaching retirement.
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About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.