The Growing Pension Risks Facing Boomers and Gen Xers
If you haven't heard of pension de-risking, you'll want to read this article
Boomers and Gen Xers may be in for some potentially unpleasant surprises in retirement.
The pension they were expecting to receive every month from their former employer might not be coming from that employer. Instead, it may be turned over to an insurance company hired to manage the pension plan and turn it into monthly annuity payments. If that happens, the pension benefits will no longer be guaranteed by the federal Pension Benefit Guaranty Corp. (PBGC), but by a state insurance guaranty agency.
Alternatively, your employer may try to get your pension off its books by letting you take it as a lump sum rather than in monthly installments. If you do this, you’ll then have to figure out how and where to invest the money in retirement.
What Pension De-Risking Is
All of these possibilities are part of a growing trend known as pension “de-risking,” “risk transfer,” “pension stripping” or “risk dumping.” They’re designed to transfer some or all of the risks of what are known as defined-benefit pensions over to retirees; they don’t apply to 401(k)-type programs known as defined-contribution plans.
As a recent report from the Marsh & McLennan Companies and the Office of the PBGC Participant and Plan Sponsor Advocate said: “It is clear that if an organization maintains a defined benefit pension plan, the data supports the fact that decision-makers within that organization are likely considering how they should be de-risking their plan or are already in the process of doing so.” Risk transfer, the report added, shows “no signs of slowing down.”
The Risks If Your Pension Is Handed Off
So what are the risks to you if your pension is handed off to an insurer?
The insurer is required to pay out the benefits the employer promised, but “when your pension is migrated to a group insurance plan, you lose all the protections that the ERISA law afforded you,” said Jack Cohen, chairman of the 134,000-member Association of BellTel Retirees, whose pension was converted to a Prudential annuity in 2013. (ERISA is the Employee Retirement Income Security Act of 1974.)
One of those protections is the PBGC’s maximum monthly guarantee for pension benefits — roughly $5,400 (or $64,800 a year) for someone age 65 — if the employer can’t make the payments. If the insurer fails, you’ll receive an amount no higher than the state maximum; the precise figure varies from state to state, but is typically $250,000 of benefits paid out over time.
In both systems, according to a 2016 report by the National Organization of Life and Health Insurance Guaranty Associations, most pension participants are fully protected. But for pensions that aren’t well funded, the PBGC generally provides a higher level of protection to participants when benefits are below the PBGC guaranty levels.
Another risk: If you’re bankrupt and an insurer now manages your pension, your benefits generally will no longer be protected from creditors, says Cohen.
One more risk: You may not receive the monthly pension benefits you’re due if the insurer can’t find you. In February, MetLife revealed that roughly 13,500 workers didn’t receive their monthly retirement benefits over the past quarter century for just this reason.
If an Insurer Takes Over Your Pension
So if you learn that an insurer will be handling your pension, contact the company to be sure it has your current address.
If you’re given the option to take your pension as a lump sum, be very cautious, said Norman Stein, a Drexel University law professor and pension expert. “Generally speaking, when you’re offered a lump sum, it has a lot less value than the benefit you’d receive” as a monthly annuity, said Stein.
“There’s a lot of bad advice from people pushing you to take a lump sum — investment advisers who want your business,” said Stein. “Most people should just say no.”