3 Things That Could Go Wrong With Your Pension

Even workers with pensions are not guaranteed a secure retirement.

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Workers lucky enough to have pensions generally have a better shot at a secure retirement than their pensionless peers with depleted 401(k)'s. But when companies face hard times, the future benefits workers expect to accrue in their pension plans are at risk. Private-sector pensions have lost almost $1 trillion in equity value over the past year. Individual pension participants are guaranteed to get the benefits they have already accrued because they're insured by the government. But the financial crisis could convince some companies that they no longer want to bear the risks of providing pension plans to employees, according to a recent paper from the Center for Retirement Research at Boston College. Here's a look at the major things that could go wrong with your pension:

Job loss. Financially strapped companies are laying off workers in nearly every industry. Pensions, which are often calculated based on your final salary, will be much lower if you are laid off in middle age. For example, if a pension pays out 15 percent of final salary in retirement, a 50-year-old employee with 10 years at the company who earns $48,000 would be entitled to $7,200 a year at age 65 if he or she was laid off this year, the Boston College researchers calculated. If the same worker continued his or her job until age 65 with a final salary of $60,000, he or she would get $1,800 more, or $9,000 annually, for the rest of his or her life. It's also extremely difficult for workers laid off in middle age to find a new job with a pension and put in enough years to qualify.

Bankruptcy. If a firm goes bankrupt with inadequate assets to honor pension commitments, government insurance kicks in. The Pension Benefit Guaranty Corp. (PBGC) pays out benefits already earned up to $54,000 annually for those who retire at age 65 in 2009 and elect payments as a single-life annuity. The limit is higher for those who retire later and lower for those who retire younger or elect survivor benefits. Some workers with high salaries and large pensions may get lower payments if their pension is taken over by the PBGC, but most workers are fully insured. Current retirees will also get payments from the PBGC if their former employer goes out of business.

Freezes. Even healthy companies sometimes decide that they no longer want to bear the burden of providing a traditional pension for their employees. One way out of the pension business is to freeze the plan. Some plans are frozen only to new employees, who then are not allowed to join the plan. Other companies promise to pay out the benefits already earned but don't allow current workers to accrue additional benefits. Sometimes pension freezes are accompanied by a new or enhanced 401(k) plan, but older workers typically don't have enough time to accrue a similar amount of potential retirement income in their 401(k)'s.

For example, a career employee who joins his or her company's pension plan at age 35 and works until age 62 might be entitled to a benefit equal to 43 percent of final earnings at retirement, the Boston College researchers posited. If the employer freezes the plan when the worker is 50 and offers a roughly equivalent 401(k), the same worker would likely replace only 28 percent of his or her income in retirement. Workers who are younger when the pension is frozen might be able to achieve the same level of income in retirement, depending on how much they contribute to the 401(k), their investment strategy, and stock market returns.