Company Is Going Bankrupt. What About My Pension?

Joseph Meyer
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Insurance On Your Pension Plan

This is a question that many retirees ask themselves. When a company declares bankruptcy, does the pension plan cease to exist too? What is the usual procedure that follows? The answer depends on the nature and type of pension plan.

In Chapter 7, the company is liquidated and the creditors are given priority. However, if the pension scheme is included in holdings as debt, then it may not be affected at all. A Chapter 11 would result in the liquidation of all assets in order to pay off the debt. A Chapter 13 means that the company has found a way to avoid bankruptcy through a debt restructuring plan. This plan may include the pension schemes.

What happens to the pension after the bankruptcy also depends on the pension type and its administrator. While many of them participate in the Pension Benefit Guarantee Corporation, others do not, and it is likely that they will cease to exist after the bankruptcy.

While the administrator of the pension plan may decide to continue it, this is possible only if there is sufficient employee participation to make continued coverage economical. At best, the pension will be reduced if it continues after the dissolution of the firm.

What Happens When a Company Goes Bankrupt?

Whether you’re working for a large company or a small business, it’s important to understand how the bankruptcy process works … and what affects your pension.

More than 382,000 companies with over 1.1 million active workers filed for bankruptcy last year. That’s more than the total for 2011, but there are fewer filings per company. The results are up to three times the budget deficit and twice the mortgage defaults.

A Few Rare Cases Under Reorganization

It is quite rare for a company with an Individual Pension Plan (IPP) to go bankrupt. By law, IPP clients must be put in a special class when a company files for bankruptcy.

If you are a pensioner, there are a few ways your pension can be affected. For example, you may not receive a monthly pension if there is no money available to cover it, and if the benefits are protected by the Wage Earner Protection Program (WEPP).

Here are common effects of a pension company going bankrupt on the beneficiaries of the plan.

  • It could result to the cancellation of pension benefits. This is a rare occurrence, but it is the risk an IPP plan takes when it buys an insurance annuity contract.
  • It could result in heavy discounting on benefits. This is under Section 85 of the Bankruptcy Code.
  • The bankruptcy court may decide to return the beneficiaries to the Pension Benefit Guarantee Corporation (PBGC).
  • A company can file for bankruptcy protection under Chapter 11. This is a reorganization rather than a liquidation. This does not affect the pension plan, and the pensioners keep getting their monthly pension.
  • An appointment of a trustee in bankruptcy can be necessary. This happens when the plan is underfunded. This does not affect the pension to the beneficiaries.

Avoiding Bankruptcy is Better For The Company

Bankruptcy is something that we don’t want to think about. Likewise, we don’t want the company where we work to go bankrupt. But what if a company with which we are vested is faced with bankruptcy or the threat of bankruptcy?

Looking to the future, consumers will likely see a rise in the number of bankruptcies or business interventions. Business Week recently reported that we are in for –a wave of bankruptcies and business failures never before seen in the U.S. industry.”

My guess is that companies are more likely to fail than in the past because of things like the increasing number of workers being hired on a contingent basis. In other words, more workers are hired more casually than in the past. Many of them have no real stake in the company beyond their paychecks, and so employees may be tempted to slack off and/or leave immediately for a new job when times get tough.

In the past, companies were really more of a “family” in that a company person was there for life, even if a new boss or CEO took over.

American Airlines Pension

Strength of the Pension Benefit Guaranty Corporation

Pensions in the Unites States are in a lot of trouble lately. In fact, you could look at a number of pension plans and draw the conclusion that almost every American is in danger of losing their pension. While that may be a bit of an overstatement, it’s true that a lot of U.S. pension plans are underfunded.

In recent years, the PBGC (Pension Benefit Guaranty Corporation) has taken a lot of the attention and the blame for this.

The PBGC is a government organization created in 1974, and its main purpose is to insure qualified private pensions. The PBGC’s job is to ensure that if a pension plan fails, pension beneficiaries receive a monthly benefit.

Most importantly, the PBGC is a backstop. That means that it has no money of its own. It cannot pay benefits. Instead, the PBGC is funded by premiums paid by private pension plans.

Whenever you read that a pension benefit is insured, what that means is that the PBGC has an obligation (contract) to pay benefits that are insured. In many cases, a pension plan simply defaults on its obligations. That makes the PBGC responsible for providing benefits.

How Does This Affect You?

It is clear that the collapse of the company is the primary emphasis in this situation. The major private pension providers have made a gung-ho decision to ensure the pension payouts are safe and protected, in the unlikely event that the company itself goes bust.

However, if you are a member of a company pension scheme you are not necessarily covered by the Financial Services Compensation Scheme. You are therefore vulnerable to the problems that the company itself faces. After all, the pension provider does not want to pay if the company does not want to pay.

However, it is rare to find a company that goes to the wall completely, as most will at least try to fund the payments…. but, in some cases, there is nothing left to extract.

Though the recent financial situation in the UK has placed a lot of trust in the banking and financial services, it is critical to note that you are no more protected from the company’s problems that you have money with than if you have no money in a bank. After all, if the bank fails you are supported by the government and you are covered by the Financial Services Compensation Scheme (FCS).