THE JOURNEY New rule for pensions: 'Nothing is guaranteed' By Janet Stewart Kidd; Chicago Tribune ~ Jun 25, 2006 Q: What happens when a company in a foreign country owns a U.S. pension plan? -- Bernard Berg, Buffalo Grove, Ill. A: Berg, 63, retired from Lucent Technologies Inc. five years ago after a 38-year engineering career that began with predecessor Western Electric Co. He saw plenty of industry change in those years, and he's still coping with it today. His former employer, based in Murray Hill, N.J., agreed in April to a roughly $14 billion merger with French telecommunications provider Alcatel. So Berg has been spending considerable time researching U.S. pension law, pondering what could happen to his retirement benefits if Alcatel defaults on the plan and wondering how to structure his other investments to help offset the pension insecurity. For their part, Lucent officials have pledged to continue the company's pension obligations after the merger, but Berg remains concerned. "If the French company defaults on pension obligations or becomes bankrupt, does the PBGC still protect the defined benefit pension plans of Americans?" Berg asked in a letter. The short answer is yes, the Pension Benefit Guaranty Corp. insures pensions of U.S. companies, regardless of whether those companies are in turn owned by a foreign company, agency officials confirmed. Unfortunately, the bigger picture isn't that simple. If it comes to default, the agency's payments--which cap out at about $47,000 a year--can fall short of the benefits originally promised by companies. Even without a default, health premiums could rise sharply, as has been the case at Lucent, effectively putting a big dent in retirement income. "We have thousands of retirees whose current pension is above that limit," said Ed Beltram, a spokesman for the Lucent Retirees Organization, an advocacy group formed in 2003. For others in the less-certain pension world, it pays to begin thinking about what other assets could replace those dollars if disaster strikes, said Henry Kaelber, a financial planner in Charlottesville, Va. If you're still working, experts said, that means putting more money aside for retirement. If you're retired, it may mean adjusting your investments, or even going back to work. "People used to think of pensions as good as gold," Kaelber said. "Unfortunately, nothing is guaranteed." Given these increased risks, as well as the uncertain future for Social Security, Berg should rethink his retirement asset plan, said Sheryl Garrett, a financial planner in Shawnee Mission, Kan., and founder of a national network of certified financial planners. "I would discount the pension and Social Security more than I would have 10 years ago," Garrett said. She recommended Berg, who has an all-stock portfolio outside the pension, put three years' worth of cash reserves into short-term instruments like money market funds and short-term bonds. It can be used for expenses without having to sell stocks in a downturn, she said. The remainder of his investments can be heavily weighted in stocks, Garrett said, provided that money is being used as an inflation hedge and it is not needed for current income. The good news for Berg is that he's just two years away from Medicare coverage, so there is an end in sight to the rising health premiums he has been socked with in recent years. Another plus: If the Lucent pension plan holds out at least another two years, his agency-insured pension amount, with its cost of living and age-weighted enhancements, would roughly equal his company-paid plan. Because the bulk of Berg's non-pension assets are in tax-deferred accounts, Kaelber recommended starting to time distributions from those accounts to maximize tax efficiency. And Kaelber advised Berg not to convert more of his traditional individual retirement account money into Roth accounts, which Berg has done in the past and has considered repeating. Doing so probably wouldn't give him enough time to recoup in investment gains what he paid out in deferred income taxes, Kaelber said. Finally, legal experts said, stay abreast of legislative efforts to stiffen pension funding requirements and investigations into potential breaches of fiduciary duties. "If I were a participant in a plan and my pension benefit was under the [pension agency's] cap, I would basically rest easy," said Edward Sharkey, a Bethesda, Md., attorney who specializes in pensions. "But if I was entitled to a larger amount, the critical current issue being wrestled with is the prudence with which these plans are being managed." E-mail Janet Kidd Stewart at yourmoney@tribune.com. Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column. Copyright © 2006, Tribune Media Services   return to LRO HOME PAGE