Can a Pension Fund Be Involved With Bankruptcy?

by Geri Terzo

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.

Plan Members

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.

Consideration

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.

Investing

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.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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