The American industrial icon General Electric recently made an ominous announcement: it is freezing its corporate pension plan, effectively shutting off any future accrual of benefits for the 20,000 workers covered by the plan (the pool had already been closed to new hires since 2012). Like many corporations, GE had underfunded the plan over time and today finds itself $8 billion behind in pension contributions, a gap which must eventually be closed.
So what happens if your pension plan closes up shop? It depends on whether the employer lives or dies.
Assuming that the firm avoids bankruptcy, it will likely seek to systematically dissolve the current structure while protecting the income of existing retirees and preserving the accrued benefits of present participants. In the case of GE, the company will continue to gradually make up the deficit over time but will not credit any additional pension benefits to workers after the effective freeze date. All participants must become 100% vested at that point.
The longer-term objective is to eliminate the pension altogether once it is solvent. This is typically done by offering to purchase a guaranteed income annuity for retirees, or to offer a lump sum payment of accrued benefits. New hires and current workers henceforth participate in a defined contribution plan like a 401(k), typically including an employer matching contribution.
What if the employer goes kaput? In general, private sector pension plans…