Pension payments are somewhat of a rarity today. They are expensive, and the paying company bears a lot of risk of future investment performance. Many companies are getting out of the business, but fortunately a lot of government workers still have this antiquated employee benefit.
Union Pacific Corporation of Omaha Nebraska recently stopped their Pension Benefit Program (as of January 1, 2018) for all new hires. They replaced it with enhanced 401(k) benefits, but this unfortunately places the burden of stock market performance and investment sophistication onto the employee’s shoulders.
For those who have access to a pension plan, this monthly cash flow often makes up for a lot of retirement needs of the recipient, and it’s critical for you to be confident that it will always be there for you.
The Wall Street Journal reported on May 9, 2018 that many pension plans are severely underfunded. This means there is a substantial risk they may not be able to make good on the promise of lifetime payments. The Journal reported that “public retirement systems had an average of 72% of assets they need to pay retirement promises,” and… “the largest U.S. corporations (S&P 500 companies) have an average 87% of assets needed to cover their pensions promises.”
This is not encouraging, and prospective retirees need to take this possibility into consideration when making their retirement plans. In fact, this unfortunate reality hit home with one of our clients that recently retired and then shortly thereafter received a letter from their union retirement plan that the promised pension payment would soon be cut in half. Needless to say, this client’s retirement reality had to be modified.
When we are in the process of building a retirement plan for a client that has a potential pension, one of the first questions we research is regarding how safe the pension promise is. Often the retiree has the option of receiving a pension or a lump-sum settlement. We typically favor the pension payment as it’s comforting to know that a check will be in the mailbox every month regardless of the stock market conditions. However, we are no longer making this decision blindly.
Union Pacific Corporation is one company that I have unique insights into. A substantial number of my largest clients have retired out of Union Pacific, and my own wife will soon start receiving a pension from her career at Union Pacific. She was offered either a lump-sum option or her promised pension. Of course, I immediately asked the Human Resource Department for “Annual Funding Notice.” This notice plus the Annual Employee Pension Guide indicated that the Union Pacific Plan has over 120% of the assets needed to meet projected (estimated) obligations. That’s great news! The only concerning fact is that this overfunded position has declined from 130% where it was a year ago.
If you desire to research your own company, the easiest thing to do is contact your specific Human Resources Department and ask for the “Annual Funding Notice.” You can also contact the Employee Benefits Security Administration by calling 1-800-998-7542 or going to www.askebsa.dol.gov.
If you are offered a lump sum payment instead of a pension payment, you have numerous factors to consider. As I have already enumerated, the first question is how safe my future payment is. There are a lot of other factors to consider as well, and you can find a previous article I wrote on this topic. Please go to www.dickinsoninvestments.com, access the “Learning Center” tab, then “Financial Planning” and scroll down to where the “Lump Sum or Monthly Pension Payments?” article begins.
Our process of financial planning is not a “one-and-done” approach. We enjoy building a strategy in advance of your retirement. We like to say this is not a book that you just put up on the shelf. Rather it’s a living document – one that we should revisit and adjust as your life continues to evolve. That’s why having a strong and trusted relationship with your planner/investment advisor is critical to your retirement success.
Financial planning is not an easy process. To do it well requires hard work and experience from “the school of hard knocks.” Fortunately we have both which hopefully translates into wisdom. We enjoy building plans and working with our clients to help them achieve their retirement dreams.
Ron Dickinson, CFP®, CPA, MPA-Tax
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]