There are two ways that a pension plan can terminate. We'll call it the good way and the bad way.
In the good way, the pension plan is fully funded and the employer simply closes it. In doing so, the employer either purchases an annuity that will pay out the full benefits on an annual basis, or issue a lump sum payment to each pensioner for the appropriate amount.
In the bad way, a pension fund lacks the money to pay benefits in full. (The technical name for this is "distress termination.") In this case, the employer has to convince authorities - either a bankruptcy court or a government entity called the Pension Benefit Guaranty Corporation, or PBGT - that there is enough financial distress to justify abruptly closing the underfunded pension. If convinced things are bad enough, the PBGT will take over the plan and doll out benefits as best it can.
Whether the pension plan goes out the good way or the bad way, the process of divvying out benefits is called the "allocation of plan assets on termination." There are various ways this can take place, depending on the specific situation.
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Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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