A traditional pension plan, with its monthly benefits, is a staple benefit of many larger companies and governmental agencies. While becoming less common, defined benefit plans remain, with many employees counting on these promised benefits. In many cases, pension benefits can be changed, and the benefits are not guaranteed to continue with the current plan indefinitely.
Public Sector Pension Plans
Public sector pension plans are among the safest of all pension plans in terms of the security of the benefits. Public sector pensions are often protected by law, and also by constitutional guarantees, defining the benefits and the fact that they cannot be reduced for current plan participants. New employees who enter the plan may receive reduced benefits or face increased tenure requirements as cost-cutting measures are introduced.
Changing to Cash-Balance Plan
Companies may change plans that promise to pay a certain amount per month for your retirement lifetime to a cash-balance pension fund. While these plans are still defined-benefit plans, the change means you only receive the actual cash balance of your plan over time, similar to how you would withdraw from a 401(k) plan. This change often results in a reduction of benefits, as the lifetime-payout method is often based on your salary during your final working years -- generally the time that your compensation is the greatest.
Freezing the Pension
A pension freeze can reduce your pension benefit, in some cases by a significant amount. Your company can decide that it is going to freeze the tenure of any existing employees. For example, if you have 15 years in with your company, and it decides to freeze the tenure of its pension plan participants, you will receive your pension benefit based only on that 15 years of service. This is true even if you end up working for the company for 30 years. Most monthly benefits are based on a formula calculating a percentage of your salary multiplied by the number of years you have been employed.
Underfunded Pension Plans
If your company has not funded your pension plan sufficiently, the plan could have problems paying for the benefits it has promised. In the most severe cases, the company could terminate the pension plan, and it could be taken over by the Pension Benefit Guarantee Corporation. While the PBGC guarantees most vested benefits, the future benefits are usually frozen, meaning your benefits are locked in at the time of the takeover. In addition, if you are a highly-paid employee, your benefits can be reduced, as the PBGC limits pension benefit payments across the board at the time of takeover.
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