Question: I work for a company with a defined benefit pension plan that just announced it would merge into another company. What can happen to my pension plan?
Answer: Mergers and acquisitions can impact defined benefit pension plans in various ways. A defined benefit plan is a kind of retirement plan that promises to pay you a specific monthly benefit for life. When your employer is merged into or bought by another company, the surviving company has several different options to deal with your defined benefit plan. These options include:
- Keeping your existing plan. In this case, your pension would likely stay the same.
- Merging your plan. If this happens, your accrued benefits would be transferred to the surviving company’s plan. Your starting point in the new plan would have to be at least as good as the ending point under your old plan. Your benefits going forward would be based solely on the new plan.
- Terminating your plan.Unless specifically prevented by some kind of agreement (a union contract, for example), an employer can terminate your defined benefit pension plan. Federal laws give some protections to members of terminated plans. For example, you would immediately be fully vested even if you have not yet met the plan’s normal vesting requirement. If, for example, a company terminated a plan that required 5 year vesting and you had only been there 3 years, you would be fully vested.
The termination of a defined benefit plan can be a “standard” termination or a “distress” termination. In a “standard” termination, the plan must have enough money to pay all benefits. In that case, the benefits would be fully paid as provided in the plan. In a “distress” termination, a plan does not have enough money to pay all the benefits. Examples of “distress” terminations include companies that have gone into bankruptcy in recent years. In these cases, the Pension Benefit Guaranty Corporation (PBGC) takes over the plan. The PBGC is a federal government agency. It acts much like the FDIC that insures bank deposits. But, like FDIC insurance, protection is limited. The amount of protection depends on when the plan ends. The maximum amount of protection changes every year and is dependent on several factors including the age of the retiree and the form of benefit. Most single employer pension plans would be fully insured. Multi-employer plans that often cover union members who work for a number of different employers in various trades, such as electrical, carpentry and trucking, also carry a PBGC guarantee but for a much smaller amount than for a single employer plan.
Keep Records! Note you should always keep a file on any pension or retirement plans you have during your career. Your file should include at least one year’s worth of statements, plus any notices or other information about the plan. This could be crucial in establishing your rights to benefits when you reach retirement age. This is especially important if a company you once worked for is ever involved in any mergers or acquisitions.
While there are protections for your pension if your company is purchased or goes out of business, there are also some risks. If you have questions about pension-related issues, you should contact Iowa Legal Aid’s Pension Rights Project at 1-800-992-8161.