Pensions offer what may be the ideal source of retirement income. I have written a number of times about the critical status of the American Federation of Musicians Employer Pension Fund (AFM-EPF), a multiemployer pension plan which covers 50,000 professional musicians in America. Given that the Actuaries do not believe that their rehabilitation plan will enable the plan to emerge from critical status, you may wonder: What would happen to your pension if the plan were to terminate or fail?
The AFM-EPF is covered by the Pension Benefit Guaranty Corporation, a federal agency that was chartered to protect pension plan participants. The PBGC is funded through required employer contributions and receives no tax dollars.
Even though the pension plan is insured, there are limits on the amount of coverage available to individuals through the PBGC. If a plan terminates and you are vested, but not yet retired and receiving benefits, you would be covered only for your currently vested benefits and would not receive any further credit for future work. This is important: The PBGC will only cover vested benefits and a plan termination will halt the accrual of future benefits.
If you are retired and already receiving benefits, the PBGC has limits on the monthly benefit they would cover. If a plan terminates and is taken over by the PBGC, you could see your monthly benefit drop by a significant amount. The PBGC provides different levels of coverage for single-employer plans and multiemployer plans. All the information below relates to multiemployer plans, such as the AFM-EPF.
(If you are also a participant in a single-employer plan, you can find information on PBGC coverage here: PBGC Monthly Maximum Tables.)
For participants the AFP-EPF, your maximum coverage under the PBGC is based on your years of service. If your pension benefit is above the monthly guaranty amount, and the plan were to fail, your benefit would be reduced to the PBGC maximum. Here’s how the PBGC calculates their coverage:
PBGC formula for Multiemployer Plans
100% of the first $11 of monthly benefits,
Plus 75% of the next $33 of monthly benefits,
Times the number of years of service.
The maximum monthly benefit under the PBGC then is $35.75 times the number of credited years of service. For example, if you were a participant for 30 years, your maximum benefit would be $1072.50 a month, or $12,870 a year. And in order to get $35.75 from the PBGC, you’d have to be receiving at least $44 from the pension. In other words, to get the PBGC benefit of $12,870 a year, your pension benefit amount would need to be at least $15,840.
Please note that this example is based on 30 years of service; if you had more or less than 30 years of service, your benefits under the PBGC could be higher or lower. The amounts for Multiemployer plans are not indexed for inflation and do not receive Cost of Living Adjustments. There is no plan to increase these amounts. Link: Multiemployer Benefit Guarantees.
Musicians need to have multiple legs on their retirement plan: pension, Social Security, investment accounts including IRAs, and other sources of income. If you try to have a plan that rests entirely on one leg, you are potentially asking for trouble. The trustees of the AFM-EPF are looking to forestall possible insolvency, but the plan actuaries do not calculate that the plan will ever recover to a fully funded status. In your planning, please consider not only the benefit offered by the EPF, but also make sure you understand and calculate what your benefit would be if the plan were to terminate and be taken over by the PBGC.