Pension Questions

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chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Pension Questions

Post by chris319 »

I have a basic question about pensions. I have read the document specific to my pension plan but the answer to my question is not clear to me.

I opted to take a "lifetime annuity" for my pension. My question is, where does the money come from? Generally speaking, is it the same as buying an annuity on the open market from a third party? Are there different ways of funding a "lifetime annuity"? Is it possible that the annuity payments to me are funded by the company and if so, what would happen if the company were to go out of business? If an annuity were purchased from a third party, would this insulate the annuity from the company's future business prospects? Does the annuity depend on ongoing funding by the company? I know that my payments come from JP Morgan Chase which offers annuities through its insurance division, so there is a clue.

Right now the company is a defendant in two major lawsuits which I suspect they will lose. A different division of the company from the one I worked for is being sued. I suspect the company has insurance for such lawsuits.

I am aware of PBGC, the entity that guarantees pension benefits as part of ERISA.

Thank you for any guidance.
Financial decisions based on emotion often turn out to be bad decisions.
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Stinky
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Re: Pension Questions

Post by Stinky »

chris319 wrote: Mon Jan 17, 2022 3:33 pm I have a basic question about pensions. I have read the document specific to my pension plan but the answer to my question is not clear to me.

I opted to take a "lifetime annuity" for my pension. My question is, where does the money come from? Generally speaking, is it the same as buying an annuity on the open market from a third party? Are there different ways of funding a "lifetime annuity"? Is it possible that the annuity payments to me are funded by the company and if so, what would happen if the company were to go out of business? If an annuity were purchased from a third party, would this insulate the annuity from the company's future business prospects? Does the annuity depend on ongoing funding by the company? I know that my payments come from JP Morgan Chase which offers annuities through its insurance division, so there is a clue.

Right now the company is a defendant in two major lawsuits which I suspect they will lose. A different division of the company from the one I worked for is being sued. I suspect the company has insurance for such lawsuits.

I am aware of PBGC, the entity that guarantees pension benefits as part of ERISA.

Thank you for any guidance.
You’d need to read your pension documents to know for sure who is providing your benefit. From what you mentioned, it sounds like the benefit is being provided by the pension plan of your former employer, with administration provided by JPMC.

Pensions are funded by the employer, and I don’t believe they pension plan assets are subject to other claims of the employer. There are federal requirements about the funding levels required for pension plans. As an active employee and now as a retiree, I receive annual disclosures from my employer about the funding of the plan.

You can look on the PBGC website I believe to see the maximum covered benefits by the government.

If the employer were to go out of business or be acquired, the intent is that the pension plan assets would be adequate to provide for all accrued benefits.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
RubyTuesday
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Joined: Fri Oct 19, 2012 11:24 am

Re: Pension Questions

Post by RubyTuesday »

You haven't provided enough information for us to know…

It could be funded by your original employer, it could be funded through a multi-employer plan, it could have been either those and then had an annuity purchased from an insurer to offload the liability, and there are probably other situations.

If it is a single employer plan covered under ERISA then the company funds and if company goes belly up it is backed by the PBGC pays (up to certain limitations).

If the liability was settled with an insurance company, it is backed by a state guaranty association.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Hamberders
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Joined: Tue Feb 05, 2019 8:42 pm

Re: Pension Questions

Post by Hamberders »

Pension plans have pension trust funds that are funded by employers and can only be used to pay benefits, investment expenses, and operating expenses.

Those trust funds are subject to minimum funding requirements under ERISA, and they must hire actuaries to calculate pension liabilities, funding shortfalls/surpluses, and annual employer contributions to the trusts.
water2357
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Joined: Sat Sep 12, 2020 9:24 am

Re: Pension Questions

Post by water2357 »

If your pension plan (defined benefit plan) has not been terminated (and you would have received a notice if this had happened), then your company is still funding your pension plan in accordance with all of the rules set forth under ERISA (Employee Retirement Income Security Act of 1974) and all subsequent amendments to this Act and all regulations established by the federal Department of the Treasury and the Department of Labor. If you ever need any information about your plan you can always contact your "Plan Administrator" as provided in your "Summary Plan Description" or contact the Department of Labor directly.

ERISA requires that all pension plans meet minimum funding standards certified each year by an Actuary Enrolled with the Dept of Treas and Dept of Labor. The Pension Plan Sponsor (your employeer) must file a 5500 form with an accompanying Schedule B each year with the IRS. The Schedule B lists the funding status of the plan and is signed by the Enrolled Actuary. All monies that have accrued over the years to fund the plan are placed in a Trust generally with a bank as Custodian of the Trust that must act only for the benefit of the participants (employees) in the pension plan. The bank you listed is most likely the Trustee for the Plan and is handling the Plan's assets, making sure they are properly invested and that payments are made to retirees.

So, your lifetime monthly pension payments are being paid out of this Trust every month. And as mentioned each year an Enrolled Actuary will tell your Employer (Plan Sponsor) how much money they must contribute to this Trust per ERISA rules, so that there is enough money there to provide for current and future benefits to all vested participants (employees).

The Plan Sponsor (your employer) must also pay Insurance Premiums to the PBGC (Pension Benefit Guaranty Corporation) to cover a certain amount of all the liability that the plan has for benefits. If your employer can no longer fund the plan due to e.g. bankruptcy, and there is not enough money in the Trust to cover all benefits, the PBGC takes over the Trust fund and applies its rules to pay benefits. These rules should be in the Plan Document under Plan Termination. Please note that a Plan Sponsor can terminate a pension plan at any time, however at that time the plan sponsor must provide enough money to the Trust to fund all benefits either directly or via annuities purchased through an insurance company. If there is not enough money, again e.g. due to bankruptcy, etc. then again the PBGC steps in. All plan terminations are in any case filed with the PBGC to verify that all participants are paid in full or that the PBGC will provide for payment according to established rules when not enough funds are available for full payment.
Topic Author
chris319
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Joined: Thu Jan 28, 2021 5:04 pm

Re: Pension Questions

Post by chris319 »

water2357: thank you for an informative post.

I should point out that the pension is no longer offered to new hires. I got lucky.
Financial decisions based on emotion often turn out to be bad decisions.
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