Is my defined pension plan kaput?

January 25, 2007 9:11 AM

What does "plan earnings are below ERISA minimum funding levels" mean?

I recently got the usual status handout about my former company's pension plan, which I was fully vested in ... one statement worried me: it said that according to an acturarial review, that the plan's earnings were below ERISA minimum funding levels.

Does this mean that the defined pension plan is no longer solvent? Just wondering???

posted by Gingercat to work & money (3 comments total)

The notice means that the funds investments will be insufficient to meet its obligations, as estimated according to the rules ERISA provides for calculating such things.

I think the notice of the sort you got is triggered when the fund is less than 90% funded (i.e. is estimated to only be able to pay less than 90% of its obligations).

This doesn't mean that the plan is insolvent. Plans can become underfunded by accident. For example, some investment of the plan may have unexpectedly dropped in value. I wouldn't jump to the conclusion that the employer is unable to keep the plan funded.

The employer is penalized for having an underfunded plan, and is required to make up any funding deficit, so the current underfunding may or may not impact your pension benefits. It really depends on the solvency of the employer.
posted by Mr. President Dr. Steve Elvis America at 10:00 AM on January 25, 2007

I think Mr. President is correct (IANAL) - here is some legalese if you want to get down and dirty.
posted by taliaferro at 10:06 AM on January 25, 2007

Under the new pension protection act there are three levels of funding deficiencies -- green, yellow, and red. Green generally means the plan is 80 percent funded, yellow generally means the plan is below 80 percent, and red means the funding is 65 percent. So for example if value of all the vested benefits is 100 million dollars and the actuarial present value of assets is 50 million, the plan has a 50% funding status and is a red zone plan. Being underfunded does not necessarily mean that the plan cannot currently pay bills and benefit payments as they come due (which is the definition of insolvency). Under the PPA, all yellow and red plans will have to adopt funding improvement plans and either increase contributions or decrease benefit accruals. Here are some helpful sites on this: http://www.segalco.com/publications/bulletins/aug06PPAmulti.pdf
http://www.milliman.com/pubs/EB/Content/BP/BPU08-17-06.pdf

Understand, too, that the funding status is not an exact science. It is based on predictions by the actuary about how well investments will do and how long people will live.
You should be able to call your plan administrator and get more information about the plan's funding level, funding improvement plan's etc.
posted by bananafish at 12:38 PM on January 25, 2007