Many governments and private companies haven’t set aside enough money to cover the retirement benefits they promised employees. Unfunded pension liabilities leave employers looking for ways to make up the difference. Accountants calculate the unfunded amount by comparing the current balance, anticipated growth and anticipated retiree benefits. Changing the terms of the pension plan payout is often the simplest way for managers to close the funding gap.
Defined Benefit Plans
Pension plans are a form of defined benefit plan. Employees typically accrue benefits per year of service, and the benefit amount is often expressed as dollars per month or percentage of final salary. Unlike other retirement savings plans, pensions shift the risk of investing over to the employer. Many pension plans are tax-qualified, and employers must comply with the protections offered by the Employee Retirement Income Security Act.
Changes to Future Benefits
Employers can make certain changes to pension plan payouts. For example, they can adjust the rate employees earn future benefits. Say you accumulate $10 per month in benefit for every year of service you worked. Your employer could say that effective immediately you will instead accumulate $5 per month in benefit for every year of service. The adjustment can't reduce benefits you've already accumulated. So if you had five years of service when the change took effect, you would have $50 per month in benefit and $55 per month when you reach six years of service.
Changes to Current Benefits
Pension laws leave a lot of discretion to the employer in determining benefits it will offer. Employees and current retirees have a non-forfeitable right to their accrued benefits once they've vested. Employer contributions vest according to a set schedule, which can be five to seven years at the longest. Beyond that, employers can make changes that affect retirees already receiving their pensions. For example, some pension plans keep retirees on the company health insurance plan. The company could decide that practice is too costly, and tell retirees that it will discontinue the benefit.
Pension Plan Goes Broke
Sometimes the company’s assumptions about pension costs and contribution returns are wide off the mark. If the employer can’t make up the unfunded liability out of pocket or by adjusting the plan, it might lead the company into bankruptcy. Retirees whose private-sector employers terminate an insufficiently funded plan might be able to recoup some of their pension benefit through the Pension Benefit Guaranty Corporation.
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