Dec 28, 2014

New law: Some fixed pensions may not be safe

Some retirees with fixed pensions funded by multi-employer pension funds are discovering that those pensions may not be so... well, fixed. This ominous news can be found deep in the spending bill Congress passed just before it recessed.

Employers in several industries participate in multi-employer plans, which are managed by professional trustees. Some of these plans are on shaky ground, due to the financial crash of 2008, greater longevity of retirees and other factors, jeopardizing their ability to meet their obligations to retirees. To save dangerously underfunded multi-employer pensions from collapse, the just-passed law allows  trustees to reduce benefits to retirees, even to those who are fully vested.

To be eligible to reduce benefits, the fund would have to be below 60% funded and declining, and a majority of active and retired workers would have to agree to the reduction. In addition, the Treasury Department could initiate the reductions if the solvency of the Pension Benefit Guarantee Corporation, which insures the funds, is at risk. 

The law prevents any cuts to pensions of retirees age 80 and above. Workers age 75 to 80 could see benefits reductions, with younger retirees subject to the largest reductions. Retirees in so-called "red zone" pensions could be affected. Many potentially affected retirees had union jobs and have generous pensions.

To find out if your pension plan has liquidity troubles that put it in the "red zone," check out the Department of Labor's website here. If you find your pension listed, you can determine the potential reduction to your benefits from the Pension Rights Center online calculator here.

While some groups, including the unions and AARP are opposed to the law, its proponents point out that there is a longstanding precedent for cutting pensions, and that reductions may be unavoidable in order to protect the most workers from the most harm. 

They say there are no guarantees in life, but most Americans cling to the notion that fixed pensions are the exception to the rule. Perhaps that is why statistics show that those with fixed pensions tend to save less than those without them. This latest development puts the lie to the belief that fixed pensions are sacrosanct. And although at this juncture the new law applies to only a certain type of pension, who knows what will happen in the future with our national economy?  The takeaway: All workers should be socking away as much as they can in 401Ks, IRAs and other self-directed retirement vehicles. 

This new development should also give pause to clients who, anticipating a large fixed pension, have decided to "self-insure" for long-term care costs. While you may not be able to count with absolute certainty on your pension, you can count on long-term care costs continuing their relentless upward spiral, which ultimately could result in your income being insufficient to cover the cost. If you have a large fixed pension and plan to self-insure, you may want to reconsider obtaining long-term care insurance. 

For an interesting perspective on many of the additional implications of the new law, check out this Bloomberg article.

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