Q. What safeguards are in place to protect pensions for retirees and future retirees?
A. If you're already receiving a pension, you're fairly safe — the pension is insured by the Pension Benefit Guaranty Corporation — although there have been some situations recently where that has not been the case. [In the case of some bankrupt airlines] some of the pilots who had already retired discovered that because the plans were so underfunded and they were under age 65, the PBGC reduced the amounts they were already receiving.
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Q. Can you explain the role of the Pension Benefit Guaranty Corporation?
A. It's an employer-funded, mandated insurance program. Definitely there has been a pattern [by companies] to try to shed the pension plan in bankruptcy. The steps to get there include not funding it appropriately. And when it comes time to turn the plan over to the PBGC, companies use assumptions to make the plan look even worse off. And bankruptcy courts have been unwilling to challenge the numbers that companies provide.
Q. Might the very existence of the PBGC act as an enabler for corporate misbehavior?
A. People have observed that, in fact, it has become a moral hazard. By creating a safety net, it has encouraged companies to perhaps not fund their plan properly or to make riskier investments because ultimately they're not going to pay the price. It's the PBGC and the participants who'll pay the price.
Q. What are cash-balance plans, and how have companies used them to reduce pensions?
A. They are essentially pension plans. [But] instead of multiplying the number of years you're there by your average salary, which produces a pension that rises quickly in value in the final years … [the cash-balance plan] basically froze it, and going forward you would only get the equivalent of something like 3 percent of pay per year, a much smaller amount.
Q. And companies didn't explain this to workers?
A. Pension law requires that if there is a significant reduction in a person's benefit going forward, they have to tell you. But many companies did not at all make it clear to people that their benefits were being reduced. Some companies went out of their way to suggest otherwise, such as Cigna. The courts found that managers had really set out to deceive employees and lead them to believe that their pensions were growing — and they were not.