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Pension 'fix' by Congress could backfire

The latest effort by Congress to save your pension may be putting it further at risk.

Tucked away in last week's bipartisan budget deal was a provision to sharply raise the premiums on a government-run fund to backstop private pension funds that go bust. With the fund falling deeper in the red, the higher premiums charged to companies offering traditional defined benefit pensions are intended to help put the Pension Benefit Guaranty Corp. back on a solid financial footing.

But critics say the higher premiums — set to rise from $57 per covered worker this year to $78 in 2019 — could prompt even more companies to freeze or close out their traditional defined benefit pensions that pay retirees a guaranteed monthly check for life.

"The premium increase is just another unnecessary burden on employers who sponsor defined benefit plans, giving them more reasons to consider exit strategies," said Annette Guarisco Fildes, president of the ERISA Industry Committee, which advocates for large companies that offer pensions.


Long before premiums began rising, companies that offer defined benefit pensions plans had been moving to freeze them (fixing participants' retirement benefits no matter how much longer they work) or closing them to new workers.

A survey released earlier this year by benefits consultant Aon Hewitt of nearly 250 employers representing 6 million employees found that, of the roughly three-quarters who still offer a defined benefit plan, a third were closing them and another third had frozen them.

Of the companies with plans that remained open, 14 percent of companies said they were "very likely" to close them this year, 9 percent said they were "very likely" to freeze them and 5 percent said there were very likely to terminate them. (Companies terminating plans typically offer participant a lump sum payout to replace the monthly defined benefit income.)

The trend continues a decade-long decline in defined benefit plans in favor of defined contribution plans like 401(k) retirement plans. That historic shift has been cited by some retirement researchers as a major reason for the deficit in retirement savings estimated by the Employee Benefits Research Institute at more than $4 trillion for U.S. households in which the breadwinner is between ages 25 and 64.

Read More For millions, 401(k) plans have fallen short

Companies that still offer their workers defined pension benefits are facing their own funding shortfall, with too little money set aside in pension assets to cover the cost of paying current and future retiree benefits.

Both public and private pension funds were hit hard by the 2008 financial crisis, which wiped out trillions of dollars in investments that were used to pay retiree benefits. Since then, low interest rates have cut returns and increased the amount of money needed to generate enough income to write monthly checks to retirees.

Underfunded pensions, of course, represent the biggest potential liability for the Pension Benefit Guaranty Corp., which steps in when a pension fund can no longer cover what it owes its participants. Many of the biggest shortfalls have hit older companies with declining profits and large pools of older workers and retirees. Of the 10 biggest pension takeovers by the agency in the last four decades, five were plans offered by airlines and four were pension plans for steel companies.

Since 2000, the cost of backstopping failed pension plans has overtaken the money set aside to cover that cost, leaving the corporation with a deficit of more than $60 billion. Without the higher premiums, agency officials say, the fund will run eventually out of money.

Estimating when that might happen is not easy, especially given the move by pension plan sponsors to reduce their liabilities by closing or freezing plans. A lot also depends on how quickly companies move to shore up pensions that are underfunded.

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Since the Great Recession ended, and the economy and stock market have recovered, many private plans have gained ground and raised funding levels. But they still face a multi-billion-dollar gap.

The defined benefit plans offered by 100 large companies tracked by benefits consultant Milliman face a $366 billion pension funding shortfall, based on the latest data available. On average, they've set aside less than 82 cents for every dollar in obligations to current and future retirees.

The recently enacted budget also includes a higher tax penalty for underfunded pensions, starting in 2017.

Those single employer sponsors, who manage pension assets for workers of only one company, are in much better shape than so-called multi-employer plans, which cover workers from more than company.

About a quarter of the roughly 40 million workers who participate in a traditional defined benefit plan are covered by these multi-employer plans, according to the Bureau of Labor Statistics.

Those plans, which typically cover smaller companies and unions, face an even tougher set of financial challenges than larger plans that can spread risk over a bigger pool of workers. Declining union enrollments, for example, mean there are fewer active workers to cover the cost of paying retirees, many of whom are living longer than was expected when these plans were established.

Multi-employer plans also face an added burden of their shared pension liabilities. When one company in the plan fails to keep up with contributions, for example, the burden on the other members increases. In the last four years, the Department of Labor has notified workers in more than 675 of these plans that their plans are in "critical or endangered status."