Pensions, Mergers and Buyouts
QUESTION: The company I work for just merged with another company. What can happen to my defined benefit pension?
ANSWER:With the mergers of many Iowa companies over the last several years, many employees and retirees are wondering what can happen to their defined benefit plans. A defined benefit plan is a kind of retirement plan that promises to pay you a specific monthly benefit for life.
There are several different things that may happen to your defined benefit pension when your employer merges or is bought by another company.
- Sometimes a new employer will let you the keep your existing pension plan. In this case your pension would likely stay the same.
- A second option is for the new employer to merge your plan with the plan that it offers. If this happens, your accrued benefits would be transferred to the new employer's plan. Your benefits in the new plan would have to be at least as good as in your old employer's plan.
A third possibility is for your employer to terminate your plan. Unless required by contract, an employer does not have to continue your pension plan. Federal laws do give some protections if this happens. For example, federal law says you will immediately be 100% vested even if you have not yet met the plan's normal vesting requirement.
If a company terminated a plan that had a 5 year vesting requirement and you had only been there for 3 years, the plan would have to treat you as fully vested. The termination of a defined benefit pension plan can be a "standard" termination or a "distress" termination. In a "standard" termination, the plan must have enough money to pay all the benefits. In that case, the benefits would be fully paid as provided in the plan. Many times the company will purchase "annuity contracts" from insurance companies to fund benefit payments. This means an insurance company would handle the payment of benefits to current and future retirees.
In a "distress" termination, a plan does not have enough assets to pay all the benefits. Examples of "distress" terminations include United and other airlines that have gone bankrupt in recent years.
In this case, the Pension Benefit Guaranty Corporation (PBGC) will take over the plan. The PBGC is a federal government agency. It acts much like the FDIC that insures bank deposits. But, like FDIC insurance, your protection is limited. If a pension plan fails and is terminated, the PBGC insures only part of the promised benefit. The amount of protection depends on when the plan ends. The maximum amount of protection changes every year. For plans ending in 2010, the permanent cap is $4,653.41, per month. This limit is for workers who retire at age 65. The amount is lower if you retire before 65 and may be higher if you retire after 65.
For more information regarding guarantee amounts, you can call the Pension Benefit Guaranty Corporation at 1-800-400-7242. While there are protections for your pension if your company is purchased or goes out of business, there are also some risks. If you have questions about this article or other pension-related issues, contact the Upper Midwest Pension Rights Project at 1-800-992-8161.
Last review 1/27/12