IBM’s Gigantic Pension Liability Is No Longer Their Problem

Worried? You Need To Determine The Viability Of Your Own Pension

There's big news from IBM recently. This is continuing a big trend and it's a disturbing one with an underlying message you need to be aware of. IBM recently transferred $16 billion from its pension plan to a group annuity sponsored by Prudential. Now, IBM's pension plan is pretty darn big. This is the largest pension plan buyout transaction in 10 years, and it's the second largest in history.

What does this mean? Well, IBM has a big pension plan. And in that pension plan, they've promised current workers as well as current retirees, that they're going to get a check in retirement. This creates a massive legal and financial liability for IBM. What many companies are discovering is that their pension plan is crazy expensive for them to manage, and they're struggling to earn enough money in that pension plan to honor their promises.

So think about this. Workers are living a lot longer than companies expected when they created their pension plans decades ago. And the performance of the financial markets, the stock and bond markets have not been as good as the actuaries have expected. And the result is IBM is finding themselves in the predicament of having to kick in more money into the plan than they had originally budgeted for. This is a big drag on IBM's profits. Wall Street isn't happy about it. The shareholders are not happy about it, and it's a real nuisance. It's a real annoyance. Well, what do you do when you have a legal liability where you've made promises to retirees who used to work for your company for 30 years, as well as current workers who are counting on you to honor your pension promises for when they retire. What do you do about it? 

IBM is putting their foot down and saying, That's it, no more, we're done. They're taking their pension obligation and transferring it to Prudential. They basically said to Pru, you take the $16 billion and you will now be responsible for it. And in the course of doing this, Prudential is putting the money into an annuity. And now the only promise that the retirees are getting is that whatever money Pru is able to produce inside that annuity contract.

In other words, you no longer have a pension plan covered by ERISA. You no longer have the legal obligation of IBM to honor their promises. IBM's off the hook. They've transferred this obligation to Prudential. And Prudential now has this responsibility for more than 100,000 IBM retirees who were covered by IBM's pension plan. The message is very clear. 

You've got to ask yourself, why would IBM have done this? And by the way, IBM is one of dozens of Fortune 500 companies that have done the very same thing. They are shutting down their pension plans. They are offloading the liabilities to insurance companies and private equity firms converting their pension dollars into annuity assets where they are not enjoying the same level of guarantees that the pension plan had offered. Why would they be doing this? Because they don't want the legal liability. They don't want the financial responsibility. They're fearful that they're not going to be able to honor it. Which means you as that pensioner, could be left holding the bag.

The message is very clear. If companies are taking this step, they are basically sending a message that they don't believe they're going to be able to honor their pension obligations and they're doing this legal and financial tactic to absolve themselves of that issue, which means you need to keep that in mind. If you were working for an employer that's promising you a pension, you must not behave as though that pension is a sure thing. It might not be. 

There is a huge pension shortfall in America, meaning the amount of money that are in pensions is not enough to fulfill the obligations that those pensions have promised. The amount of money they promise to pay you for, the number of years they promise to give it to you, they're not going to be able to honor that. Which means you could discover in your 80s or 90s that the pension has gone bankrupt, that the pension has simply run out of money, that the company might no longer exist, crushed by the pension obligation financially. So if you've got a pension being promised to you where you work - wonderful, fabulous. Glad to hear it. You're among a minority of American workers. Don't assume that you therefore don't need to save for retirement. You do. You should act as though the pension doesn't exist or maybe cut the number in half of what they're promising you on the attitude that, well, they're only going to give you half of what they're promising. You should take the attitude that you need to save for your retirement just like everybody else has to do.

You can't take the cavalier attitude, well, gee whiz, I've got a pension. I don't have to worry about it. Just because you've got a pension doesn't mean your worries are over. You might have to worry about it after all. And that's the real message here. Got a pension? Good for you. Save anyway. Otherwise, your financial future may be far worse than you're expecting.