The recent collapse of the Executive Life Insurance Co. is teaching both workers and retirees a startling lesson. The pension you think is guaranteed may not in fact be protected at all. It might be covered only by an insurance company -- and who knows whether, 30 years from now, that company will be able to pay?
Right now, Executive Life has enough assets to meet its pension obligations -- or so says California's insurance commissioner. If its money runs out, however, those checks may stop.
Most workers assume they're protected by the federally chartered Pension Benefit Guaranty Corporation (PBGC), which is funded by private corporations and which covers failed pension plans. And you are, as long as your company keeps your pension in its own pension trust.
But employers are increasingly transferring pensions to insurance companies, which makes the insurers responsible for making payments. When that happens, the PBGC backs out. If the insurer fails, and doesn't have enough assets to keep its commitments, the state insurance guaranty funds are supposed step in.
* Only 21 state funds clearly cover pension annuities (although others may decide to cover them, too).
* Maximum coverage is generally $100,000. If your pension fund is larger, your income will be reduced.
* When it comes to failures the size of Executive Life, guaranty funds are essentially a fraud. They didn't even have the money to handle the much smaller Baldwin-United collapse back in 1983. Holders of Baldwin annuities were recompensed by an industry bailout lasting several years.
To see exactly how well you're protected, find your situation on the following list:
* You're retired and getting a pension based on your age, salary and years of service. It's paid by your company, directly from the pension trust. You're safely insured by the PBGC, to a maximum of $2,250 a month for individual retirees at age 65.
* You're retired and getting a monthly pension funded by an individual insurance annuity. You are not protected by the PBGC or by your employer. You'll lose your income if the insurer runs out of assets, unless a state guaranty fund steps in.
* You're working and your retirement fund is building up.
Your protection depends on which of the following three types of pension you have:
(1) If you're guaranteed a fixed monthly benefit, and your pension fund buys such things as stocks and fixed-income securities, you're insured by the PBGC up to the maximum allowed. You'll be paid if your pension plan is terminated.
(2) If you're guaranteed a fixed monthly benefit, and your company has backed it by an insurance contract, the nature of your protection depends on the contract.
With an "unallocated" annuity (which covers workers as a group), your employer usually has to step in if the insurance company fails, says Carol Flowe, general counsel for the PBGC. If the pension plan fails, the PBGC would pay. But if your entire pension benefit is dumped into an individual annuity, established in your name, the obligation is transferred to the insurer and, from there, to a state guaranty fund.
(3) If you have a profit-sharing plan, a 401(k) or a typical Keogh, you're not insured. These plans rarely fail, although your investments could drop in value.
State-guarantee funds work well when the failed insurance company is small. But you cannot count on them when a biggie goes down. If the losses mount in Executive Life, retirees will holler at Congress, which might dump the whole mess onto the PBGC, says Washington attorney and pension expert Michael Gordon.
But that's no solution, either. The companies that fund the PBGC are not paying enough as it is. Right now, the pension insurance fund is nearly $2 billion in the hole.
Who will pay if employees lose the pensions they've been counting on? No one, it seems. The policy of industry and government is merely to keep their fingers crossed.