Bad business conditions and bankruptcy creates a loss of assets, reduction in benefits, or loss of employment for workers and retirees, according to Carol Bogosian, co-author of the Society of Actuaries’ Managing Post-Retirement Risks: Strategies for a Secure Retirement report and president of CAB Consulting.
Among other things, pension benefits can be reduced when an employer 1) freezes pension plan benefits or terminates a pension plan, 2) eliminates or reduces contributions to defined contribution plan, 3) lays off employees, or 4) goes out of business or declares bankruptcy.
On the market side, benefits may be reduced if an insurer that is providing annuities becomes insolvent and the state guaranty fund is insufficient to cover the full obligation, Bogosian said.
How to manage this risk?
At a minimum, become familiar with defined benefit plan issues; consider defined contribution plan issues; and understand annuity contracts:
In addition, Bogosian recommends diversifying your assets to avoid investments in any single company. “And that includes your employer, avoid a heavy concentration of employer stock in your defined contribution plan or your personal assets, especially if you're an executive and you've accepted a lot of stock options,” she said. “Watch those because those are where you're also at risk.”
Second, understand your Pension Benefit Guaranty Corporation (PBGC) and state guarantee limits. “Both of those have limits on the benefits they're willing to provide,” she said. And, if you hit those limits, how would that affect your pension and annuity benefits so you plan around that.”
Avoid concentration in any one insurance company when you purchase an annuity to maximize your state guarantee fund limits.
And, in instances where plans were truncated, either terminated or frozen, you may be offered a lump-sum distribution in lieu of the pension benefit payments you're either entitled to or receiving. “First, learn how taking the offer would really affect your long-term risks in your retirement income and your future living standards,” she said. And then second, be very realistic, whether you can actually invest that lump sum of money and replace that income to assure that you'll have income for life.”