Jump to content

How to decide whether to take the pension at 55 or 65?


Peter Gulia

Recommended Posts

Imagine that your client is an individual who is a vested participant in a multiemployer defined-benefit pension plan. He is entitled to a pension, which the plan estimates as $1,958 per month, beginning at his age 65. But he also is entitled to claim his pension as early as age 55, with a plan-specified early-retirement reduction. He is 56 now. His employer is no longer a participating employer, and does not maintain any retirement plan.

Although the individual does not need the pension money now, he is considering claiming his (reduced) pension now. Why? He believes the plan will become insolvent. He has seen his employer and several others withdraw from the plan; much of the industry's business goes to non-US providers; most of the US business does not require union labor. We have read the pension plan's Form 5500 reports for the past few years. The plan, although not reported as "critical", has not obtained (even with PPA surcharges) the contributions needed to fund the plan. Asking for contribution rate increases when a collective-bargaining agreement expires has resulted in yet more participating employers withdrawing from the plan.

What professional methods should one use to help this individual evaluate his choices?

I consider the early-retirement reduction of the pension as a kind of "premium" that buys some insurance against the risk that the individual's pension would be cut (or eliminated) in the plan's insolvency. Is this a logical way to think about it?

If one assumes that the plan becomes insolvent before the individual turns 65, how does one estimate how deeply his normal pension would be cut?

What other risks and trade-offs should a professional consider?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

  • 2 weeks later...

I was hoping someone with multiemployer DB experience would respond. I don't have any advice, just something else to consider. If I'm off base, hopefully someone else will jump in.

If the plan is as underfunded as you seem to think, I don't think starting monthly benefits early gives him much protection from a benefit reduction if the plan ends up at PBGC. If I read the PBGC website correctly, his accrued benefit is more than what the PBGC guarantees for a multiemployer plan. If he retires early and the plan later becomes insolvent, I would expect his monthly benefit to be reduced to the maximum amount the PBGC guarantees. The guaranteed amount is reduced for early payment, so I would expect whatever he can get now to still be above the PBGC maximum. If the plan is better funded than you think, then the situation may be different.

Link to comment
Share on other sites

Don't know if multiemployer rules are different, but it is possible for a retiree from a single employer DB plan to continue receiving benefits higher than the PBGC guaranteed benefits.

The meaning of the early-retirement reduction is to receive the smaller benefit for the longer period. The value comparison depends on the reduction.

I would suggest speaking with an accountant or a financial advisor who may review this situation from the multiple personal angles to help with this decision.

Link to comment
Share on other sites

Don't really know the multiemployer rules well at all, but if the situation was sufficiently dire, isn't there some mechanism for cutting back some of the benefits? If so, would they be able to cut benefit amounts to people already retired, especially if they had retired early, to the same extent that they could cut potential benefits to non-retired participants?

Always check with your actuary first!

Link to comment
Share on other sites

A few things to consider:

1) Generally early retirement "reductions" in a multiemployer plan are really subsidies and are designed to provide incentive to take early retirement. Even though they are lower value, the reduced value does not compensate the plan for the lost interest. In other words, it is generally to the advantage of the participant to take the early retirement benefit. This is just a generalization, you would need to really review the actual factors being used to determine if this is true in this case.

2) consider the individuals life expectancy and general health. If he does not intend to live well into his 80s, less now is probably more valuable than more later. (This assumes that he is not currently "active" with the union or working in the industry. Would he have to terminate employment to collect his benefit, or has he already terminated? Obviously, many other considerations if the has to terminate employment to collect this benefit.)

3) It is very difficult for a participant to make an educated analysis of the plan's funding position. Participants often overreact to the plan's current status. Just because the liabilities exceed the assets doesn't mean the plan in in imminent danger of collapse. It could be in trouble, but if it isn't currently Critical or Endangered, it probably has a decent life expectancy.

4) If it is a dying industry and or dying local, that is a bad sign and could definitely lead to problems down the road.

5) Currently there is no way to ratchet down benefits to lessen the impact of an insolvency. Several unions are working with the PBGC and Congress to develop such a system, but so far nothing has come of it. The benefits would stay at their current level until the fund completely runs out of money. Once that happens, the benefit are slashed down to PBGC maximums (very low) and the PBGC loans the fund money to make the payments. This would then basically continue until in perpetuity.

6) If the plan is really going to be insolvent in the near future, it would be best to take less now, because the future will only bring even less. However, the participant is most likely overreacting to the plan's current situation. It may be in trouble, but still 20+ years to insolvency. It is really hard to tell without more information.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

Has the individual inquired into the withdrawal liability of the withdrawn employers? I have no idea if the 5500 would reflect this liability but I would presume the plan's audited financials (at the very least in the footnotes) would report about it. Combine that info with Effen's analysis above.

http://www.wickenslaw.com/wp-content/uploads/2012/01/Multi-Employer-Pension-Plan-Withdrawal-Liability.pdf

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

Thanks, everyone, for the suggestions.

I likely will engage an actuary to help me with the math analysis about (i) estimating how many years are likely to elapse before the plan becomes insolvent, (ii) whether (and how much) the plan's early-retirement reduction is steeper than just actuarial equivalence, and (iii) whether that difference is a logical risk premium for getting some payments before the insolvency cut.

I expect to integrate that analysis with my political advice about the likelihood or unlikelihood of Congress changing the law.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

FWIW, everything I am hearing implies that Congress is fairly likely to change the law. The NCCMP proposals have some strong supporters and possible legislation is being drafted. It is still a long way from reality, but it isn't completely out of the question either.

The current thinking is that Congress will most likely let the PPA provisions sunset, then they will jump into action in early 2015 and apply some sort of retro-active fix. Most people seem to want real change, but we might just get another band-aid.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

For an interesting illustration of some employers joining with unions for a lobbying statement:

http://www.solutionsnotbailouts.com/About/business-and-labor-support

They suggest that a multiemployer pension plan's trustees might choose a set of cutback provisions that is somewhat more efficient than those that would result under the law that governs the plan's insolvency. In effect, they ask for an opportunity to impose a restructuring before the insolvency happens.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...