It's not suprising that financially distressed companies often cut retirement benefits. But many employers are eliminating pensions for workers, even when they have the money to pay out benefits. In fiscal year 2007, 1,225 employers voluntarily ended their pension plans with assets sufficient to disburse all benefits earned to workers, according to data released this week by the U.S. Pension Benefit Guaranty Corp. (PBGC), a government agency that insures private-sector pension plans.
The primary reasons companies gave the PBGC for ditching their pension plans were restructuring benefits (31 percent), benefits too costly (19 percent), adverse business conditions (14 percent), administration too costly (10 percent), sale of a company or component (8 percent), liquidations ( 5 percent), or other reasons (14 percent).
Fewer than half of these terminated pensions were replaced by another retirement plan. Active participants in only 585 of the 1,216 eliminated plans have access to a successor retirement plan - typically a 401(k) plan (360 plans). The next most common replacement offered was a profit sharing plan (115 plans).
When a company chooses to end a pension plan, they must either buy annuities for participants and beneficiaries from a private-sector insurance company or pay the benefits earned directly to participants as a lump-sum distribution. Approximately $3.1 billion was distributed to participants in terminated plans in fiscal year 2007. About $1.2 billion was used to purchase annuities and $1.9 billion was paid out as lump-sum distributions. The payouts averaged $42,000 per participant.
PBGC also became the trustee of an additional 110 plans as the result of involuntary or distress terminations in 2007.