Retirement Planning and the PBGC

As we approach the new year, we will no doubt hear the verse “auld lang syne”. The reference to the phrase, thought to have first been coined by Robert Burns (1759-1796), actually translates into “once upon a time”. When we begin the discussion on pensions in the book, we look thoughtfully back to an era when the obligation to employee was more than simply wage-based, it was a lifelong agreement with the firm.


Guy Lombardo played this song on a 1929 radio broadcast forever associating it with the passing of the New Year.




David McCarthy, author of numerous papers and as the book notes, a lecturer at the Oxford Institute of Ageing, at Oxford University (what the book doesn’t say is that he has since changed that position and is now a lecturer in the Finance group at the Tanaka Business School) studies the role of pensions in business.

His belief that pensions have an important life cycle is the cornerstone for much of his work. When the Employee Retirement Income Security Act of 1974 altered the way companies treated pensions – which are not an obligation under the law, the interaction, not to mention the relationship the employee may have had with the employer, changed forever as well.



The life cycle Dr McCarthy wrote of saw workers entering into an agreement with their employer when they were the most vulnerable cash-wise but had the most to offer from a human capital point of view. Pensions, through their conservative nature offered these employees a beginning at a future they might have ignored otherwise. When the human capital was at its lowest point, the pension was there to help.

Pensions unfortunately do not come with property rights. If a company is sold, dissolved through bankruptcy, or simply goes out of business, the employee can run the risk of losing most of their pension. This was the argument made for the 401(k) plan and was used by President Bush as the basis for his privatization of Social Security.



There are some safe guards in place. The PBGC, or Pension Benefit Guaranty Corporation insures against total loss but has not only a limited reach (companies need to participate in the program by paying premiums for the insurance guarantees.)

Here’s a recent example of how the PBGC works with smaller, lesser know companies.

”Tom's Foods filed for Chapter 11 protection in April 2005. In October 2005, it was purchased by Charlotte-based Lance Inc. for $40.2 million plus the assumption of some company liabilities. The transaction did not include the pension plan.”

Also noted in the article by Steven Taub for CFO.com was this comment about the transactions: “because Tom's Foods missed nearly $4.5 million in required pension contributions and the pension plan will be abandoned as a result of the sale of substantially all of the company's assets.” PBGC has guaranteed no interruption in pension payouts for current retirees and guarantees the pension for those that have vested.

How much pension you receive should your former employer face such events depends on when you retire. Recently, the PBGC, which was created by ERISA, raised its maximum pension payout for those retiring at 65 years old in 2008 to $51,750 (that is a 4% increase over the previous limit of $49,500 for plans ending in 2007.)

The maximum amount of payout for an individual who retires at 75 is $157,320 with a guaranteed benefit of $12,938 for those who retire at 45.

There are ways to check to see if your pension is at risk of being under funded. One is to ask for a health record of your plan. Troubled plans usually rely on optimistic projections of the underlying investments or worse and secondly, because of poor performance of the company leaving the plan with no funding to meet its obligations. Those obligations by the way are a result of actuarial tables used to determine the life span of the workers. If you sense your company is in trouble, plan for the worst – even if your pension payout is guaranteed.