Can a Pension Fund Be Involved With Bankruptcy?
Original post by Geri Terzo of Demand Media
A pension can be involved with a bankruptcy as it relates to the plan sponsor, or to the employer overseeing the plan. Some bankruptcies are more severe than others, and the worst liquidations could leave pension assets in the hands of some insurance entity. A business that intends to emerge from bankruptcy might not need to surrender its pension assets as long as there is adequate funding for the plan.
Pension Benefit Guaranty Corp.
There are usually few winners when a company files for bankruptcy, and pension members are no exception. Once a company files for bankruptcy, it may decide to terminate its pension plan. This is especially likely if the company does not expect to emerge from bankruptcy. The Pension Benefit Guaranty Corp. is a federal insurance agency for certain pension plans. It pays retirees some benefits, but not necessarily the entire amounts owed, when their companies cannot.
Financial hardship for a plan sponsor, or an employer, can have lasting effects on a pension even if the plan is not terminated. Employers typically make cash contributions into a pension plan to keep it properly funded. Those deposits, coupled with investment performance, generate the benefits that retirees receive. Although United Airlines emerged from bankruptcy protection in 2007, its retiring employees received a rude awakening: Their pension benefits were lower than expected.
Even when a company that is in bankruptcy arranges financing and intends to emerge from insolvency, there is no guarantee that a pension plan will avoid the Pension Benefit Guaranty Corp. In 2011, Harry & David Holdings was poised to emerge from bankruptcy but still planned on ending its pension plan, according to the Pension Benefit Guaranty Corp. The agency was required by law to cover some of the pension funding, even though it urged the company, which had attained private equity financing, to assume its own pension obligations.
A pension plan can also gain exposure to bankrupt companies. In 2010, the Teacher Retirement System of Texas revealed that it would allocate $500 million into bankrupt General Growth Properties, a property-management company, according to an article on The Austin American-Statesman website. The company eventually emerged from bankruptcy. The investment was part of a broader plan on the part of the pension to expand into a different asset class that could improve returns without erratic performance.
- The Baltimore Sun: General Growth Properties Emerges From Bankruptcy; Nov. 9, 2010
- The New York Times: Small City, Big Debt Problems; Mary Williams Walsh et al; Aug. 1, 2011
- Pension Benefit Guaranty Corp.: General FAQs About PBGC
- Pension Benefit Guaranty Corp.: Bankruptcy Court Rules Against Harry & David Pensioners; Aug. 8, 2011
- ABC News: Next Recession Victim: Your Pension And Retirement Plan; Scott Mayerowitz; March 30, 2009
- The (Austin) American-Statesman: Texas Teachers Pension Fund Invests In Bankrupt Mall Giant; Kate Alexander; July 12, 2010
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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