Allocation Of Plan Assets On Termination

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.