How are Pension Benefits Computed?

How are Pension Benefits Computed?

Enrolled actuaries must be used to establish the benefit formula.The amount of money you will receive (monthly) from your employer during retirement is calculated by a formula which incorporates your age, your salary, the number of years you worked for your employer, and other possible factors.

The IRS stipulates that an enrolled actuary must be contracted to perform the calculations, with input from the employer, to determine how the benefit will be calculated and to make sure that the plan assets will be sufficient to pay the benefits when the employees reach retirement.

Unfortunately, Pension payments are only guaranteed up to a point. The Pension Benefit Guaranty Corporation is a Federal government entity which takes premiums from pension plans to insure the benefits are payable. The PBGC only insures pensions up to a point, however, and in 2016 the PBGC is lobbying congress for help since they may not be able to continue supporting failed pensions for much longer.

Something like 10% of pensions have failed in the last 20-30 years. People are living longer than they ever have, so the mortality experience that the actuaries planned on in the past may not have been an adequately conservative estimation. Also, interest rates on safe investments such as U.S. Treasuries have been very low for a long time, and now even money market funds do not have to maintain the value of a dollar.

Combine that with the need of companies to cut corners and impress shareholders quarter-to-quarter, and you’ve got a recipe for disaster with a defined benefit plan. In the last 30 years, most employers have shifted to defined contribution plans which leave the investment risk on the shoulders of the employees.

Pension liabilities can cause companies to declare bankruptcy. Recent legislation in a 2014 omnibus bill made it possible to lower the pension benefit that was previously guaranteed to pensioners, which had not been possible before.

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