Bob French, CFA

What Happens to Your Pension If Your Former Employer Goes Under?

bankrupt pensionPensions, along with Social Security, are the core of most people’s reliable income in retirement – they’re what many people plan to live off of. They’ve contributed to their pension fund for years, often decades, and they’ve built up a sizable chunk of change – with a little help from their employer – to draw from in retirement.

But what if your employer goes bankrupt? Well, if the company is liquidated, the pension plan will be terminated (and the same can happen in the case of reorganization).

So where does that leave you? Will you still get your pension? If so, will it be reduced? Will it be delayed while the courts sort out the mess?

There’s (mostly) good news.

Nearly all pensions – with the notable exception of pensions from professional service employers (doctors, lawyers, etc.) with fewer than twenty-six employees – are insured by the Pension Benefit Guaranty Corporation.

The PBGC is a federal corporation funded by premium payments from the insured pensions that serves as a backstop to make sure pensions are as safe as possible. It was established in 1974 to ensure an orderly transition and the continuation of benefit checks in case something happened to former employers.

That doesn’t mean you have nothing to worry about, though. If you were planning on receiving a large pension benefit and the plan wasn’t fully funded when the company went under, your payments may be reduced down to the maximum guaranteed benefit.

The maximum guaranteed benefit from the PBGC is defined based on the age you start drawing your pension. In 2016, for a sixty-five-year old, the maximum guaranteed benefit was $60,136 per year. If you start claiming your benefits before you turn sixty-five, then your maximum guaranteed benefit will be lower. If you start claiming after you turn sixty-five, the maximum guaranteed benefit will be higher.

The maximum guaranteed benefit is adjusted for inflation every year. The PBGC uses the same cost of living adjustment calculation as Social Security. Since there was no cost of living adjustment for Social Security in 2016, the maximum guaranteed benefit will not increase this year.

It’s good to know the PBGC is around just in case, but hopefully you never have to learn more about their inner workings. It’s much easier to just keep receiving the checks from your employer’s fund.

For more on paying for retirement, read our ebook How Will You Pay for Retirement?

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