Saturday, November 15, 2008

New pension rule may affect payouts for some retirees

A growing number of defined-benefit pension plans, especially small- to-mid-sized plans, could be in trouble this year because of the struggling stock market combined with a little-known provision in the Pension Protection Act of 2006.  Under PPA, firms with defined-benefit plans have to use something called the Adjusted Funding Target Attainment Percentage, or AFTAP, when calculating pension distributions for newly retiring workers.
The AFTAP, in essence, measures a plan's funded status. A plan that can pay out all that it owes its retiring workers is 100% funded. In days of yore, employers would typically offer retiring workers the option of taking their pension either in a lump sum or an annuity. But starting in 2008, the law requires employers tell workers if their plan does not have sufficient funds to pay out all of the employees, according to Brett Goldstein, pension administrator and president of the Pension Department, a consulting firm in Plainview, N.Y.  If the pension plan does not have enough money to pay at least 80% of the employees, then the notice states that employees can only get 50% of their pension as a lump sum and the remainder as an annuity. If the pension plan does not have enough money to pay at least 60% of the employees, then the notice states that employees can't get their benefit as a lump sum, only as an annuity.

Given the big decline in the stock market this year, the AFTAP will likely come into play, especially for would-be retirees at many small- to mid-sized firms, Goldstein said. Goldstein estimates that workers at some 25% of small- to mid-sized firms will be offered the "under-funded" payout options when they retire in 2008 instead of the traditional full lump sum or annuity options. And that could lead to financial distress for some households, he said.

Source/more:  Market Watch

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