By J.J. Conway
Most lawyers share a common experience when it comes to client-intake interviews. A potential client contacts the office with a problem that seems to come up over and over again, but there is nothing legal that can be done about it. The client's view seems reasonable, and even plausible, but there is no legal right of entitlement to begin with. In nearly 25 years of operation, our office fields this type of question, regarding the inheritability of pensions, at least once per month.
Here's the factual scenario: At a family gathering or a in a memorable conversation, a widowed or divorced father (it's almost always a father) tells a beloved son or daughter that he has left them his pension. It comes up in a "when I'm gone" conversation. Upon hearing this, the kids are touched by the gesture, tuck it away in their memories, and then return to that memory years later when the father passes away.
Here's what they know at the time they contact a law office: their fathers worked "for years" (it is usually 30 or more years) and typically in unionized employment and was at death collecting a pension. Here's what they've done before contacting a lawyer: they've tried reaching out to the father's employer and the union and have gotten nowhere. Here's what they want: the pension, of course. Here's the problem: there was unlikely any inheritable pension to begin with.
In the U.S., traditional pensions, as opposed to 401(k)-style contribution plans, are vanishing. Most will be gone in the next fifty years for all but government workers. They are hot in litigation right now because Baby Boomer retirements have unearthed myriad issues regarding retiree benefits - from missing pension credits to loss of employment records.
For retirees living on a pension, the pensions, themselves, are often the subject of a lot of conversations with family and friends about things like Cost of Living Allowances (COLAs) or changes to the retiree's health plan. Retirees talk a lot about their pensions. So, it is plausible that family members would be under the honest, but mistaken, belief that they stand to inherit a pension when a family member dies.
But pensions are their own entities with their own written rules much like contracts. Company pension plans were set up and funded according to actuarial expectancies using formulas based on length of service and wages earned. After a life of work in service to an employer, there was the promise of a financially secure retirement. Pension plans were designed to match with government sources, like Social Security, to provide fixed income and sometimes other benefits to employees during their retirement.
Under traditional rules, pensions are paid out as a straight-life annuity over the life of the employee or a joint-life annuity, paid to the employee and a surviving spouse. Also, if a married couple divorces, there are rules that allow for the pension to be split or shared during a division of assets.
Under the first scenario, a straight life annuity, an employee would collect a monthly payment from retirement until death. Under the second scenario, a joint-life annuity, the employee would collect a smaller monthly payment, and then at death, that monthly payment would continue at the reduced rate for the life of the surviving spouse. At that spouse's death, the pension would end. The plan had no further obligations to the employee or the employee's spouse.
Pensions are expensive and, owing to strict federal funding requirements, they can cut into a company's balance sheet. Paying beyond the lives of one or two people within a range of similar life expectancies would be highly unusual since there is no such requirement and could be, quite possibly, financially harmful to the company. So, while a pension plan could theoretically allow for a payout to child, there is nothing legally that would require this and given the expense, it is very unlikely.
That said, this is not always the case. In Michigan, for example, in certain defined benefit plans, state employees have the ability to list a non-spousal survivor who could inherit the employee's pension or a portion of the vested pension benefit. There are strict rules surrounding this particular survivorship designation, but a child could inherit a parent's pension at death. But for the most part, in the private sector, there is no inheriting a monthly pension benefit when a parent dies.
So, is there anything else that can be passed on to the kids? Yes, in fact, employees can bequeath their unused 401(k) assets or their IRAs. Some retirement plans still provide retiree life insurance or a death benefit in addition to monthly pension payments. The death benefit was a modest payment designed to help pay for funeral costs. A parent could list a child or children as beneficiaries on either the life insurance plan or to collect the death benefit.
Tracking down a promised pension can also be expensive. Adding to the cost and complexity of a child searching for a possible pension payout is the realization that children lack standing to request any information about their parent's benefits directly from the employee benefit plan. Curious children looking for promised pensions do not have legal standing under federal law to request information about their parents' benefits. The plans don't make exceptions either. So, if they want to really secure this information, they must open an estate, secure a probate appointment, and request pension plan information on behalf of the deceased parent's estate. This is a move that could cost thousands of dollars and likely lead nowhere
So, the next time the conversation turns to the gift of a pension, while everyone's alive, it might be worthwhile to look into whether there is anything else to put in the will because, odds are, it won't be the pension.
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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and founder of J.J. Conway Law in Royal Oak, Michigan.
