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The Law

Pensions and the Bankrupt Employer

Gerald Fairbanks and Jean Rhian have pensions. That's the good news.

Her pension is with Ford. His pension is with General Motors. That's the bad news.

The auto industry has suffered a great deal during this recession, requiring the federal government to step in. Last month, President Bush agreed to provide $17.4 billion in federal loans to GM and Chrysler. As a condition of the loans, he demanded a corporate restructuring and cuts in union wages and benefits. Ford has said it does not need government aid at this time.

Fairbanks and Rhian, married for 25 years and residents of Easton, have been retired for nearly 10 years. He retired from his job as an engineer at 62. She took a buyout from her job as a systems analyst at 56. Both receive Social Security and each has an Individual Retirement Account.

They own their home and have no credit card debt. But they wonder if they will keep receiving the same pension benefits if either of their companies goes bankrupt.

"I've been wondering if I should go back to work," Fairbanks said.

"I'd say we're worried. Is there anybody who is not worried?" asked Rhian.

It's probably safe to say that the more than 40 million Americans who still have pensions are at least a little bit worried right now.

According to Mercer, a consulting firm, the stock market turmoil of the past year has left corporate pension plans at the largest companies underfunded by $409 billion. At the end of 2007, those plans had a $60 billion surplus.

Auto pensions perhaps are some of the most problematic. U.S. automakers have four retirees for every active worker.

Jeffrey Speicher, a spokesman for the Pension Benefit Guaranty Corp., would not comment on individual pensions because their coverage depends on a variety of factors.

But he did say that Detroit's Big Three automakers face a $41 billion pension shortfall. If the PBGC had to take over the pensions of all three automakers, it would end up paying about $13 billion of that amount because of limits set by Congress.

"The rest of it would be lost benefits borne by the workers and retirees," he said.

Those who would lose out would probably be new retirees, those who took early retirement, and those who earn the highest pensions.

Speicher pointed out that the agency doesn't automatically take over the pension when company goes bankrupt. "First of all, the company needs to decide if it wants to terminate the plan," he said. "If it does want to, it has to demonstrate it cannot afford the plan."

If the bankruptcy court agrees that the company cannot afford the plan, the PBGC will then guarantee individual pensions up to a certain amount.

For a company that cannot afford its pension plan in 2009, the agency would cover up to $54,000 of annual pension benefits for workers who retired at age 65. Those who retired at an earlier age would get less. Those who retired at a later age would get more. For example, if you retired at 62, you would receive up to $42,660.

There are other limits, such as this: The PBGC cannot guarantee benefit increases made within the five years prior to plan termination or the date the company filed for bankruptcy.

Speicher said that most workers need not worry too much. Most receive annual pension payments below the $54,000 maximum. On top of that, he said that it was unlikely that all three automakers would require the PBGC to step in.

The bottom line: It is hard to say what the Easton couple could expect to recoup. Anthony Shelley, of the District law firm Miller and Chevalier, recommends that retirees working for bankrupt companies remain vigilant. If your company is terminating your pension plan, it is required to notify you.

"Be advised of your rights and be in contact with either your attorney or the PBGC in the event that the company does go bankrupt," he said.



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