February 21, 2012

We've had thousands of people asking us questions about KRIP. Mostly, these questions are some form of 'is my pension safe during Kodak's bankruptcy?' In this spirit, here are 5 things to know about KRIP:

  1. The Pension is Funded. Pension funding is given by Kodak to a trust. The trust is a separate legal entity and its monies - the pension funding - cannot be used by Kodak for corporate purposes. It can only be distributed by the terms of the trust document. Currently, the Pension Benefit Guarantee Corporation (PBGC) is auditing the funding level of the pension. The last review by Kodak had the funding level at about 96%. The PBGC has returned with a lower number - 86%. The difference in the numbers could be caused by different methods of calculating the funding, the time difference between the two reviews, the inclusion of a subsidiary's pension (Qualex) or a combination of any of these things. All in all, 86% is not a bad level to be at; we are currently waiting to hear more from the PBGC about the state of the Kodak pension.
  2. Any Underfunding is Likely to be Made Up by Kodak. Kodak has stated that KRIP payments should not be affected by the bankruptcy. Pension funding is not dismissed lightly in bankruptcy court, particularly when the company in question is sitting on so much potential value (patents, profitable business lines). If Kodak decided it did not want to fund any shortfall in its pension, it would have to prove to the court that it cannot continue to exist without reducing or avoiding this liability. That's a high hurdle!
  3. The Pension is Insured. In the unlikely event that KRIP shortfalls cannot and do not have to be paid by Kodak, the PBGC would step in to take over the pension. The PBGC insures pensions up to a maximum amount per year (your maximum is findable in these tables) just like the FDIC insures bank accounts up to a limit (in the PBGC's case, the limit varies based on factors like age and type of pension). The PBGC taking over the pension will likely mean a little more hassle - extra paperwork, an estimated interim payment while the PBGC operations gather all of KRIP's information - but it also means that pensions are much more secure. This may help all pensioners sleep a little better at night.
  4. Lump-sum Payments May Come Back or May Not. The lump-sum option offered by KRIP has been suspended while the PBGC audits the pension fund. This is a legal requirement - pensions are required to enter what is called a 'restricted period' while they are being audited by the PBGC. If the pension fund passes the PBGC's test or if it fails but Kodak makes up the funding gap, the lump-sum option is likely to return. We should know more in 2-3 months about how likely that is. The purpose of this suspension is to provide some stability to the pension fund while the PBGC tests the funding level.
  5. You Can Decide to Take the Lump-sum Later Even If You Take the Annuity in the Restricted Period. Those eligible for the lump-sum option may elect to take it if and when it is offered again even if they elect the annuity during the restricted period. This is an important option as it allows those set to retire now to do so without foregoing pension cash flow and without giving up the lump-sum option should it return. The lump-sum will be reduced by annuitized payments already made, but other than that, the lump-sum option should look the same as it did before the bankruptcy filing.

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Chris Cromwell
Business Development Manager
Brighton Securities