Pension Liability?

What is the name of your state?What is the name of your state? DE

I work for a large multi-national corporation. Lots of rumors floating around about switching from our traditional pension to a cash-balance pension. If this were the case, we would each keep the amount of pension liability associated with each of us, and future contributions would be a percentage of our respective salaries. Calculation of the pension liability is an obvious concern. Our present plan calculates pensions based on a multiplier (0.013) times final salary times years of service. Pension liability would be the amount required to fund this tradional pension in the future. Is this calculated based on:

1) Pension that we would get assuming we worked to the full-pension eligibility age, with final salary based on some escalation of today's?
2) Pension that we would get if we were terminated today, voluntarily or otherwise? (pension would be based on fewer years of service plus lower salary)
3) Some combination, such as total years of service up to full eligibility, but at today's salary?

Is the present versus future liability discounted by some factor accounting for the earnings that are expected by the pension fund? For example, given a 10% return and a fixed pension amount, the liability would increase by 10% yearly. If an individual were 10 years away from retirement, the liability would be only 35% of what it would be 10 years from now, again assuming a fixed pension number.

Hope these questions make sense! Thanks.

Yes, the questions make sense but I'll be very surprised if anyone here has the answers. I expect only an attorney specializing in ERISA and/or an expert in pension actuarial science can answer those questions and so far, I haven't seen any of those folks hanging around here.

Since you work for a large multi-national corporation, if this change comes to pass you can anticipate that a bevy of highly qualified attornies and pension specialists will have been working on this, as pension plans are highly regulated by federal law and being a large company means they're much more likely to have these changes subjected to very close scruitiny when the relevant documents and changes are submitted to the DOL and the IRS. In other words, if they don't do everything entirely by the book, the odds of their Plan(s) being audited will go WAY up.

I suspect you can anticipate that if the company changes from a definied benefit plan to a defined contribution plan, all the issues you are asking about will be fully explained.

Upon further reflection, alternative 1 does not make sense. That would say that upon termination of the old plan, the company would pay your retirement account enough to fund a full pension, plus kick in a percentage of your salary each year on top of that. If that's the formula, then by all means convert me over to cash balance, boss!

I certainly agree that the company is not likely to try to "pull a fast one" when and if we are converted over. The figures that we will get are likely to be similar to the ones we see when we all get speculative voluntary retirement "packages" during the bi-annual layoffs - just numbers, no explanation of how they were calculated, no evaluation of alternatives, etc. I want to be able to make as informed decison as possible when the time comes.

Thanks for your help; I will keep looking for answers.

FYI - many employers have dropped defined benefit (pension) plans in favor of defined contribution (401k) plans over the last decade or two. Your employer isn't doing anything new and whatever attornies and retirement plan experts they'd use will undoubtely have considerable prior experience in doing this and will know exactly what has to be done to comply with the relevant laws and employee communications needs.

No doubt that it will all be legal and above-board, when and if it happens. It is not illegal activity that concerns me, but rather what is actually legal. At IBM, the amount of money that each person started with when they were converted over was calculated by retroactively applying the defined contribution formula. This meant that most employees saw a 35% to 40% reduction in the accrued balances they thought they had. Some employees quit rather than be converted over. IBM did back off on converting everybody over. The new plan is being challenged in court, but as an age-discrimination case rather than a challenge to the pension system itself. Sounds like the situation is crying for legislation. I still need to investigate the facts and figures to satisfy myself of exactly what it means, but that's what I have discovered so far.