The Great American Pension has been in decline in recent years. But if you’re among the fortunate ones who lay claim to a defined benefit pension, 2008 is a good year to pay close attention.

New federal rules could affect your benefits, depending on the financial health of your fund. At minimum, the changes, which are kicking in this year, create greater transparency that will help you understand how your plan is doing.

The new rules were mandated under the Pension Protection Act of 2006 (PPA), a sweeping reform of U.S. pension law that came in response to catastrophic, high-profile failures of big plans at companies like United Airlines, U.S. Airways, Bethlehem Steel and others.

Despite such bad news—and moves by many companies to shed defined benefits in favor of alternatives like 401(k) plans—traditional pensions actually haven’t yet become extinct.

Benefits consultant Watson Wyatt says about a third of all U.S. employers still have defined benefit retirement plans—that is, plans with specific cash payouts that are promised to employees at retirement. The numbers are higher when you look only at sizeable companies; 54 percent of companies with more than 5,000 employees still offer defined benefit plans.

Under the PPA, pension plans will be placed in categories that reflect their financial health and ability to pay out promised benefits. In general, the new risk ratings will be based on a plan’s funding level—the assets on hand available to handle the promised payments (liabilities). All plan sponsors will be required to bring their plans to 100 percent funding levels over the next seven years, via increased contributions or improved investment performance.

Starting this year, plans with funding ratios below 80 percent are prohibited from making lump sum benefit distributions to participants—a popular option in recent year (although not always the smartest approach). And if a plan has a funding ratio below 60 percent, the most significant restriction kicks in: Benefit accruals are halted until funding ratios are improved.

“Say, you work for a unionized company where the monthly pension benefit is $50 multiplied by your years of service,” says Rebecca Davis, an attorney with the Pension Rights Center, a non-profit group that works on retirement security issues. “If accruals are frozen, your employer stops counting your years of service right where you are. So, your ultimate benefit will be reduced because it will reflect fewer years of service.”

How likely is it that your plan is in trouble? Unfortunately, there’s no simple answer. Alan Glickstein, senior consultant at Watson Wyatt and a pension expert, says most plans at sizeable companies are in good shape. “When I look at the thousands of plans our firm manages, less than 20 percent will have any difficulty meeting the 80 percent threshold in 2008.”

David Tananbaum takes a different view. “No pension plan in this country should be funded at less than 100 percent—right now.” Tanenbaum is an actuary and the founder of AtPrime Media, an interactive publisher that offers free online tools that help consumers keep tabs on their pensions. The company’s most useful tool is the Pension Inspector, a searchable database that contains records on more than 50,000 pension plans.

I asked Tananbaum to analyze the plans he tracks to determine how many have adequate funding. For 2005—the most recent year for which data is available—the Pension Inspector showed that 45 percent were funded at less than 100 percent of liabilities. “I’m very upset about these numbers. We’ve got a lot of work to do.”

To be sure, Tananbaum and Glickstein are measuring different years—Glickstein’s figures reflect improved funding levels since 2005. And Tanenbaum’s data includes very small plans that cover relatively few workers. Still, the best way to get comfortable with your own plan’s financial health is to check it out for yourself.

PPA also improves on the financial reports that employers must make to plan participants, requiring an “annual funding notice” containing detailed information on financial performance, the number of individuals receiving benefits, accrual information and other details. The first reports will cover 2008 performance, and must be mailed in the Spring of 2009.

Pension Inspector also can help. The database aggregates and analyzes records from reports that employers are required to file with the Internal Revenue Service. Pension Inspector grades each plan with a simple red-yellow-green color scheme that indicates its relative financial health. Just as important, the AtPrime Media site provides contact information for plan administrators.

So, if you don’t want to wait until 2009 to learn how your pension’s doing, try this high tech approach: Pick up the phone and call your plan administrator.

RESOURCES

The Watson Wyatt chart below shows the percentage of companies in the U.S. offering various pension types, by size and industry. Click the chart to display it in a larger size.

Tags | pensions, planning