How Safe Is Your Pension?

Defined-benefit plans represent a promise, but whether it will be kept depends on the type — and your employer

Back Longreads Nov 18, 2019 By Steven Yoder

(Editor’s note: After this story published in the November issue of Comstock’s, The McClatchy Co. reported a third-quarter loss of $304.7 million and announced that the IRS had declined the company’s request for a three-year waiver of its minimum required pension contribution. It also said it won’t have the means to make $124 million in pension funding due in 2020 and it is in talks with the Pension Benefit Guaranty Corporation, a federal agency, about the possibility of the PBGC assuming the plan’s assets and obligations. As of March, the pension plan held $1.32 billion in assets but was underfunded by approximately $535 million.) 

When financial writers describe the shrinking group of people with a pension, the word “lucky” comes up a lot. That’s because pensions — also known as defined benefit plans — put the risk on employers, who are on the hook to pay retirees an agreed amount no matter what happens to the underlying investment. By contrast, most workers who have a retirement plan are in a defined-contribution arrangement like a 401(k) or individual retirement account that puts the risk of a market downturn on them. 

At least that’s how pensions are supposed to work. But Pamela Martineau has no faith that will happen. Martineau, 56, is a former senior writer with The Sacramento Bee, owned by Sacramento-based McClatchy. She left in 2007 after spending 10 years there and is taking her pension payments early — she started drawing in January. The plan allows participants to begin withdrawing as young as age 55, but her early withdrawal means she’s getting only 70 percent of what she would if she waited until age 65. But she’s taking no chances. 

“A part of the reason that I took my pensions now is that I am worried about the integrity of the funds in the future when so many people will be drawing pensions and there will be fewer workers,” she says. “I feel it is a distinct possibility that those of us who are even drawing pensions now could see them cut in the future if another financial meltdown occurs similar or worse than the Great Recession of 2008.”  

The state’s pension landscape consists of three varieties. Private single-employer plans like McClatchy’s are rarer than in the past when employees spent their career with one firm. Less well-known are private multiemployer plans, a model designed to let companies join together to pool risk and take advantage of economies of scale. And best known are the plans that cover current and former public employees, mostly of state and local agencies and teachers: the California Public Employees’ Retirement System and California State Teachers’ Retirement System. 

Most of the attention given to pensions has focused on public plans because so many are covered by them — CalPERS and CalSTRS have nearly 3 million members combined — but some private plans are in far deeper trouble. For employees and retirees, that means staying on top of how their company’s plan is doing and taking steps to advocate for themselves in the event of problems.

There’s no clear evidence McClatchy’s pension will fail, though some signs are troubling, according to area actuaries. The company froze its plan on March 31, 2009, meaning no participants accrued benefits beyond that date, and new hires couldn’t enter. The plan’s funded ratio — what it has in assets vs. what it owes in future payouts — was 85 percent in 2017, the latest reporting year. That funding level means it’s not considered to be at risk under federal rules. In most cases, at risk is defined under federal law as less than 80 percent funded. But McClatchy’s 2017 number is down from 93 percent in 2015, and its funding shortfall in that period rose from about $99 million to $229 million.

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Numbers like those aren’t necessarily a cause for concern, says Eric Petersen of Hicks Pension Services in Fremont. Another area actuary, Marc Roberts, president of Chico-based Associated Pension Consultants, says it’s an encouraging sign that the company froze the plan.

Still, Roberts says if the company is in financial trouble, those numbers are “definitely going the wrong direction.” On that score, the news hasn’t been good of late: By  September 2018, McClatchy’s stock had lost nearly all its value, and the company’s debt was more than 10 times its market capitalization, according to a report by the Poynter Institute, a media research organization. On July 19, the company notified the U.S. Securities and Exchange Commission that it had requested a waiver from the IRS of its $120 million minimum required contribution to the pension plan under federal law, explaining in its application that “contributions are expected to exceed the Company’s ability to pay them in the next 14 months.”

McClatchy declined to respond to questions about the status of its pension fund. Spokesperson Jeanne Segal released a statement noting in part that “current and former colleagues in our pension program … have dedicated their energy to our enterprise and we are steadfast in our intention to honor their work. We also have an obligation to manage prudently the company’s balance sheet for the future sustainability of our company.” The waiver request, the statement noted, is designed to help fulfill both goals. 

How Healthy Are Pension Plans?

Of the three types of pensions, the private single-employer plans, like McClatchy’s, are in the best shape. The funded ratios of S&P 1500 company plans averaged about 85 percent in December 2018. For small single-employer plans, funding ratios are even higher, usually at least 90 percent, says Roberts. Contrary to the trends elsewhere, demand for pension plans among small employers is booming, he says. They’ve been more popular in the last two years than ever, especially among high-income companies like law and physician practices, he says.  

On the next rung down the solvency ladder are the state’s public pension plans. CalPERS’ funded ratio was 70 percent as of July, about where it’s been since 2011. Meanwhile, CalSTRS’ ratio is 64 percent, and the system implemented a plan in 2014 that uses increased contributions from the state, school districts and employees that it says will get it to 100 percent funding by 2046.

Worst off are multiemployer plans. One that covers some workers in the Sacramento region illustrates why. The Automotive Industries Pension Plan covers about 25,000 people, most in Northern California — current or former employees of companies like UPS and Waste Management and of auto dealers, repair and machine shops, and the like. In 2000, the plan had 450 contributing companies. 

Then came the 2000 dot-com crash and 2008 recession, sinking the plan’s investments and sending it careening toward insolvency — meaning not enough money to pay promised benefits. In a coup de grace, when General Motors and Chrysler nearly collapsed in 2008, thousands of dealerships, including 50 in the Bay Area, that had been contributing to the pension fund went out of business. That also led to the shutdown of auto parts shops and other businesses in the plan. By June 2018, only 155 employers were contributing, and the plan was paying out $6 in pensions for every $1 it was getting in contributions, according to a letter plan trustees sent to Congress. 

To get back on the road to solvency, in 2016 the trustees sought federal approval of benefit cuts that averaged 38 percent for most participants, from $974 monthly to $601 on average. But the U.S. Department of the Treasury rejected the proposal, largely because the agency concluded that it didn’t use reasonable actuarial assumptions. 

But the trustees could submit a revised proposal that includes similar cuts. Something has to give: As of April, the pension was projected to run out of money to pay full benefits by 2031. Its trustees referred questions about next steps to Alameda-based attorney Sun Chang, who told Comstock’s she’s not able to share information about the trustees’ strategy for paying full benefits beyond that year. Leaders of several local unions that participate in the plan didn’t respond to requests to speak about the fund’s problems and how it would affect their members.

Multiemployer plans elsewhere are in even worse shape. The Road Carriers Local 707 Pension Fund in New York, for example, covered workers in jobs similar to those in Automotive Industries. When the fund collapsed in 2017, almost half its 5,000 plan participants lost 50 percent of their earned plan benefits. More than half of the 10.6 million people covered under multiemployer plans are in one with a funded ratio lower than 50 percent, according to Tom Reeder, a former director of the federal Pension Benefit Guaranty Corporation, which partially insures retiree benefits when plans fail. (Automotive Industries was 53 percent funded as of January 2017.) And in July, PBGC director Gordon Hartogensis issued a release calling the multiemployer system “in crisis.”

Taking Back (Some) Control

Pension plans that are struggling but haven’t yet failed are taking steps that squeeze retirees. More pensioners are facing recoupment claims than in the past, says Jennifer Anders-Gable, managing attorney at the Western States Pension Assistance Project in Sacramento. In those cases, the plan claims a pensioner has been overpaid for months or years, sometimes by tens of thousands of dollars, and wants the money back. Recoupment claims are “98 percent of the time” the plan’s fault, says Anders-Gable. Spousal rights cases — in which the pensioner dies and the plan claims it doesn’t owe the surviving spouse what the spouse believes they’re entitled to — also have grown dramatically in the past two years, she says.

Current workers are also being asked to make bigger contributions from their paychecks. For CalPERS employees in two unions, for example, contributions have gone from 5.5 percent of salary in 2013 to 8.5 percent today, says Ted Toppin, chair of Californians for Retirement Security, which represents 1.6 million public employees and retirees. Teachers have faced similar increases. 

All that means a pensioner’s fate depends on where they worked. Those in private company plans will more likely fare best. Not only are those plans better funded, but the Pension Benefit Guaranty Corporation program that insures those pensions are adequately funded: With a few exceptions, the PBGC guarantees up to about $65,000 a year. Those with state pensions also are safe as long as the “California Rule,” which so far has been upheld in state court rulings, stays in place. It treats pensions as contracts that are sacrosanct and requires any benefit cuts to be offset by a new benefit of equal or greater value, though at least one case pending before the California Supreme Court will again test the rule.

Related: What if you don’t have a pension?

As for the precarious multiemployer plans, their future is mostly in the hands of Congress. There’s no consensus on how to rescue them. A bill that passed the U.S. House in July, largely with Democratic votes, would provide low-interest, government-guaranteed 30-year loans designed to let them get back on their feet. But its prospects for passage in the Republican-controlled Senate appear dim. At the same time, the PBGC program that partially insures beneficiaries under multiemployer plans is near collapse. (A separate PBGC program covers single-employer plans.)

To take back some control, workers and pensioners can first find out about the health of their plan. Roberts says the best source is the annual funding notice that plans must send to participants by 120 days after the close of the plan year. It gives a three-year snapshot that shows, among other details, the funded ratio — which ideally is trending up and is higher than 80 percent — and the maximum the PBGC will pay out in the event the plan sponsor declares bankruptcy. For more detail, including whether the plan is considered at risk, participants can get the plan’s annual report, known as Form 5500, from the U.S. Department of Labor’s website, says Petersen.  

In an uncertain era for pensions, Anders-Gable says there are a few basics. Keep all your pension documents forever, not just for seven years as you would for taxes, especially the record that every employee gets on leaving a company showing what they’re owed. If you’re owed a pension and aren’t getting what you think you should, start by getting your detailed earnings report from the Social Security Administration, which shows every place you’ve worked and what’s due to you; she says it’s a great starting point for working out problems with a pension administrator. And if you’re stonewalled, get help. Her project recovers a total of about $2 million a year for clients, she says. 

Today’s pension uncertainty might spur workers to do the one thing many of us have control over: Put money away. “If there’s action for us to take as individuals, it’s to increase our personal savings,” says Petersen.  

That’s what Martineau says she’s done; she moved to Maine, where her cost of living is cheaper. She no longer believes in financial guarantees, including promised pensions. She says, “The Great Recession has forever changed my view of money in a way the Depression probably changed my parents’ view of money. Now I don’t believe there are any financial guarantees, and our government cannot protect us against bank failures, insurance bankruptcies, etc.”

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