Pension Funding Deficit Reaches 50-Year High -- Should You Be Worried?

Last Updated Oct 5, 2011 6:33 PM EDT

The market swoon in last month didn't just hurt your portfolio, it also clobbered corporate pensions. The total deficit of U.S. pension liabilities increased by $134 billion to $512 billion as of September 30, according to worldwide HR consulting firm Mercer. The reported deficit compares pension liabilities to assets in pension trusts for defined benefit retirement plans sponsored by S&P 1500 companies. The increase in the deficit results from a combination of stock market declines and decreases in yields on high-quality corporate bonds during the month. (Pension liabilities rise when interest rates fall, due to reduced expectations for future investment earnings).

In aggregate, the funded ratio (assets divided by liabilities) for these plans is now at 72 percent, down from 81 percent at year-end 2010. Mercer believes that the funding deficit, in aggregate dollar terms, is at an all-time high since the end of World War II.

While the news sound dire, this information only affects you if you participate in a defined benefit retirement plan, whether it's a traditional pension plan that pays a monthly retirement income or a cash balance retirement plan that typically sets up a retirement account for you. If you only participate in a defined contribution retirement plan, such as a 401(k), then there's no direct impact on you -- not counting any possible drop in your 401(k) account caused by the stock market decline.

The immediate consequences for a defined benefit plan depend on the actual funded status of the plan at the end of its plan year, which is typically December 31. The following consequences apply to the defined benefit plans of businesses and nonprofit organizations (but not to the pension plans of federal, state and local government employees):

  • If your plan's funded status falls below 80 percent at plan's year-end you may receive a notice by September 2012 indicating that certain optional forms of payment, such as lump sums, are restricted. Lump sum payments are common with cash balance defined benefit plans, less common with traditional pension plans. If these restrictions apply, there's a chance you might only be able to receive a portion of your total benefit as a lump sum with the rest payable as a lifetime monthly income. Any such restriction would not apply until you are notified by your employer.
  • If your plan's funded status falls below 60 percent, then the plan is prohibited from allowing additional benefit accruals until the plan's funded status recovers above this level.
Most plan sponsors go to great lengths to avoid these consequences, meaning that they often contribute enough money to avoid triggering these restrictions. Click to the next page to learn what actions you can take to protect yourself.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.