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Pop goes the pension: How corporate bankruptcy can impact your retirement

Mar 12, 2012, 6 a.m.

The recent recession has fueled renewed concerns about corporate bankruptcy and retirement options being lost. Theoretically, companies who fully fund their pension options should not affect your retirement options or income at all. However, this "requirement" is not always a reality.

Are you aware of the Pension Benefit Guaranty Corporation (PBGC)? An independent agency of the U.S. government, PBGC was created as part of the landmark Employee Retirement Income Security Act (ERISA) in 1974. Along with other retirement options protection and security, ERISA and PBGC focused on safeguarding pensions and ensure payment of pension benefits.

Retirees who fear their pension options are threatened because a former company is now bankrupt are smart seniors. Bankrupt employers who faced cash flow or revenue problems over the long-term often failed to fully fund their pension plans. This is where PBGC can help.

If a former employer went bankrupt, you may or may not receive the defined benefits you were promised. Those employers who continued to fund their pension options should still allow retirees to collect benefits as agreed. Those employers, intent on conserving cash in dark times, may not have funded plans for some time, leaving them unable to pay promised benefits. These are situations when PBGC may step in to pay your benefits.

If your pension options with a bankrupt employer disappeared, PBGC may be able to pay those benefits. Depending on the circumstances and the promises of former pension plans, PBGC may step in. Be aware, however, that if your former pension options promised excellent retirement options -- with above average monthly benefits -- PBGC may deliver reduced payments.

During 2010 alone, PBGC paid out over $5.5 billion in benefits to recipients of failed pension plans. However, the recession caused 147 pension plans to fail during that period, and PBGC suffered an $23 billion increase in their deficit . Currently, PBGC pays retirement benefits to around 630,000 people, former participants in 3,800 defined benefit plans that failed, often because of employer bankruptcy.

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