I've been spending the better half of the last couple of days researching pensions. As I learn more, I will post them. If you already know this stuff, bear with me, as I don't.
We had been discussing the Enron scandal and concerns about pensions. For those that are not aware, the Pensions Benefit Guaranty Corporation (PBGC) is a federal corporation created by the ERISA Act of 1974. Here is a statement from their director:
Statement of PBGC Executive Director Bradley D. Belt on Enron
"Enron has repeatedly said that it wants to do a standard termination of its pension plans, where a private-sector insurance company takes over the obligations and pays promised benefits. That would be the ideal outcome for participants and the pension insurance program. Unfortunately, by its own admission, Enron has failed to make any progress toward executing a standard termination. With today's action, Enron raises even more doubts about its willingness to keep its pension promise to workers and retirees. If Enron fails to carry out its commitment to do a standard termination, the PBGC is ready to assume the pension obligations, pay participants their guaranteed benefits, and pursue its claim against Enron for the full amount of the underfunding."
PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits for about 44 million American workers and retirees participating in over 31,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by PBGC's investment returns.
Here's a little more from their website:
WASHINGTON — The Pension Benefit Guaranty Corporation (PBGC) reported today that it is holding $75 million in unclaimed pension benefits for 26,000 people owed money from terminated defined benefit pension plans.
"We urge everyone to check the Pension Search directory on PBGC's web site to see if they, a friend or a relative are missing any pension dollars earned during their working years," said Executive Director Bradley D. Belt. "We want people to get the retirement money they worked so hard to earn."
Quite honestly, it doesn't make me lean any further over into defined benefits schemes (what we have been calling pensions) versus the defined contribution scheme <401(k)> that we have in place, I just found it interesting.
For those interested, the AARP has an excellent site to start from. It spells out simplistically some concerns and questions we should have about any defined benefit plan.
Defined benefit' plans still option for stable employers
Funding costs make benefits expensive for small firms Carolyn Hirschman Special To The Austin Business Journal
Traditional employer-paid retirement plans have lost ground to 401(k)s, but they still make sense for certain employers, experts say.
Traditional "defined benefit" plans guarantee certain payments at a certain age, generally 65, upon retirement. The employer pays for the entire benefit, which is based on a worker's final salary and years of service.
In contrast, "defined contribution" plans require workers to set aside part of their incomes, often with a partial employer match. Benefits depend on the amount invested and returned on the workers' chosen investments.
Which type of plan best suits a company depends on its work- force composition -- age, gender, compensation and turnover rate. Some employers offer one or the other; others offer both.
It's clear, though, that defined benefit plans are becoming less popular. In 1992, there were 88,621 define benefit plans, down from 174,998 a decade earlier, according to the U.S. Department of Labor.
During the same period, the number of defined contribution plans jumped almost 50 percent from 419,458 to 619,714, largely because of the growth of 401(k) plans.
But defined benefit plans have more assets -- $1.1 trillion in 1992 vs. $947 billion for defined contribution plans, federal statistics show.
Because they cost more to fund and administer, defined benefit plans are most often found in the public sector and at large, private employers.
They're also common at small trade associations and labor unions.
Pluses and minuses
Defined benefit plans have their advantages and disadvantages. Although employers bear all investment risk -- benefits must be paid, regardless of how the market performs -- they also can deduct contributions from their annual income taxes.
Defined benefit plans reward longevity, so they make sense for companies where workers stay put. For example, a Silicon Valley software startup with high turnover is not a good candidate; a large, stable utility is.
"Small companies have pretty much fled defined benefit [plans] because of the funding cost and the administrative cost," says Frank McArdle of Hewitt Associates, a benefits consulting firm based in Lincolnshire, Ill.
"It's very rare to see an existing company or a startup putting in a defined benefit plan. But employers are trying to repackage their defined benefit plans into hybrid plans that look and feel like a 401(k)," says Charlie Habliston, a retirement planning consultant for William M. Mercer Inc. in Washington, D.C.
One innovation is the "cash-balance plan." As with 401(k)s, employees get regular statements showing their pensions' current value. Employers still pay all contributions and choose all investments, but "the benefit has more tangible value," Habliston said.
The goal is "to get people to appreciate the benefit they're getting," says Ken McDonnell of the Washington, D.C.-based Employee Benefit Research Institute.
Getting started
To start or change a defined benefit plan, experts recommend hiring a consultant to design the plan and to ensure compliance with a host of federal laws and regulations. Pension rules were simplified last year as part of the minimum-wage law, but there still are a lot of them.
"The reason they changed the law is [pensions] are horribly complicated. People are constantly getting into trouble with the IRS. It's hard to do the arithmetic right," says Dick Schreitmueller, a principal and pension actuary at Alexander Consulting Group in Baltimore.
In addition, the law requires a federally certified actuary to determine exactly how much an employer must contribute to the plan each year, based on future liabilities. It's a complex calculation that takes into account the number, age and income of participating workers as well as returns on the employer's investment portfolio.
To decide how much to spend and who should get benefits, an employer should analyze its objectives, Schreitmueller said. What type of employees does it want to hire and retain? What do current workers like and dislike about their retirement plan?
Focus groups and interviews with top executives may help answer these questions. The bottom line is to meet employees' needs. In general, older employees (in their 50s) tend to favor defined benefit plans.
Cash balance programs still have their problems as well. Right now, IBM settled a lawsuit in regards to their cash-balance pension plan they have. This is what came off the AP yesterday:
IBM Agrees to Deal That Settles Most Claims, Caps Company's Potential Liability at $1.7 Billion 09-29-2004 8:03 PM
NEW YORK -- IBM Corp. and plaintiffs challenging the legality of its pension plan agreed to a deal Wednesday that settles most claims and caps the company's potential liability at $1.7 billion. The company previously had estimated that a settlement could cost up to $6.5 billion.
IBM reached a $20 million settlement earlier this month with 15,000 of the 140,000 workers who claimed its adoption of a "cash balance" pension plan discriminated against older workers. That agreement, together with Wednesday's $300 million settlement, will lead the company to take a one-time charge of approximately $320 million in the third quarter.
The latest deal, which must be approved by the U.S. District court for the Southern District of Illinois, ends the company's pension litigation on all but two claims.
The plaintiffs settled for much less than IBM's highest projection because some lawyers believe a federal judge's ruling against IBM earlier this year may have been wrong, said Bruce Wolk, a law professor at the University of California, Davis, School of Law. A federal court in Maryland ruled for a company in a similar case, he said.
"I'm not surprised there's a big discount, because IBM had a pretty good chance," he said.
IBM announced the deal after the end of regular trading. Its shares closed at $84.98, up 50 cents, on the New York Stock Exchange, then gained 4 cents in extended trading.
The crux of the case is the company's "cash balance" pension plan, which it adopted in 1999 for all new employees and some long-time employees.
Cash balance plans, which mushroomed in popularity in the 1990s, resemble 401(k) plans in that they let workers track the growth of their money in a hypothetical individual "account." Unlike a 401(k), workers can't allot any of their own pay toward the plan or decide how it's invested.
Traditional pension plans reward workers for staying with a company over time, often making their last years with the company the time when their eventual pension increases the most.
Cash balance plans are computed using a formula that awards benefits at a steady rate through a worker's tenure, which awards workers who jump from job to job more benefits than they would have under a traditional plan. But a worker counting on a leap in benefits at the end of his career can be sorely disappointed if his company switches to a cash-balance plan not long before he retires.
The federal judge hearing the IBM case ruled in favor of the workers earlier this year, saying the company's cash balance plan is illegal because it discriminates against workers on the basis of age. IBM has said it will challenge that contention.
The other remaining issue is the plaintiffs' contention that the transition from the previous pension plan to the cash balance plan was also age discriminatory. The judge has ruled for the plaintiffs on that as well. IBM has said it will appeal.
The cash balance ruling "potentially affects millions of American employees working for a broad spectrum of companies and non-profits," said Jesse Greene, IBM's treasurer.
If its appeals fail, the company has agreed to pay up to $780 million as a remedy on the claim that the plan itself is discriminatory and $620 million as a remedy on a claim the transition was discriminatory.
In the coming months, class members will receive formal notice of the settlement and the judge will hold a fairness hearing. If the settlement is approved, IBM will file its appeals.
The company said the process could take more than two years.
Well, anyway, I think the point to all of this is that defined benefit pensions are unbelievably complicated, quite possibly troublesome. If it is the decision of our members to go with a defined benefit pension scheme, they had better know what they are getting into, no matter what what financial mechanism is used to manage it.
The Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans, had a surplus of $9.7 billion at the end of 2000 but a deficit of $11.2 billion at the end of 2003. Pension plan underfunding stands at more than $350 billion, which increases the likelihood that more pension plans will go under and taxpayers will eventually be called upon to provide a bailout. In temporary legislation passed in April 2004, Congress reduced the required contributions companies must make to their defined-benefit pension plans by an estimated $80 billion over two years by changing the formula used to calculate pension liabilities. Congress also provided additional relief of approximately $1.6 billion to steel and airline companies with heavily underfunded pension plans. Rather than place the PBGC on sounder financial footing, those measures will likely worsen the agency's financial condition.
If what you say is true, then it seems to me we could be leading our members down the wrong path with defined benefit pensions plans, regardless of who's plan it is.
For those of you that have been strong advocates of defined benefit pensions, you need to take a second look at this stuff.
It's not that I don't believe Kevin Tarbell; I just like to check things out for myself. But it appears he is right. Check this out, especially for you Democrats out there!!
Statement by Honorable George Miller (D-CA) Senior Democrat, Committee on Education and the Workforce
Hearing on Strengthening Pension Security and Defined Benefit Plans
Thursday, September 4, 2003
Mr. Chairman,
For over a year, the Bush Administration has repeatedly ignored our urgent requests to wake up to the serious problem of pension underfunding. For example, I wrote to the Administration in July of 2002 to take action when pension deficits skyrocketed from $26 billion to over $100 billion. It failed to act.
Now, over a year later, the problem is worse and festering. As the PBGC is testifying today, pension plans are now $400 billion in the red nationally, the largest liability in history, and the PBGC is reporting a $5.7 billion deficit as of July 31. The Administration’s failure to take decisive action on pensions, its failed economic policies, and its utter neglect of our manufacturing industries have together precipitated the largest underfunding of private pensions in history.
Today, hard-working Americans already are taking it on the chin. Three million private sector workers have lost their jobs since 2001, and the long-term unemployed have been left to fend for themselves when their extended unemployment benefits run out. Workers in the manufacturing sector have seen their jobs vanish oversees, and their industry ignored by the Bush Administration’s economic policies. Working families have already lost billions in irreplaceable life savings in their 401k plans as the stock market crumbled and corporate abuse ran rampant. Pensions for millions of Americans are threatened by the Administration’s cash balance proposals, which may cost older workers up to half their expected pension benefits.
Mr. Chairman, as you know the GAO is very concerned about the condition of private pensions and the strength of the agency that is responsible for guaranteeing those pensions. In July it announced that it had placed the PBGC on its list of federal programs that are at “high risk” for failure.
Today, the GAO broadens its analysis further and makes clear that our pension rules are clearly broken, and in need of reform. Some of the biggest companies PBGC has taken over or on the pension ‘watch list’ have been able to exploit pension rules riddled with loopholes and escape hatches. Over the past few years, companies have been permitted to publish in their annual reports rosy financial pictures about their pensions, while at the same time running the plan into the ground through reductions and freezes in pension contributions. Conflicts between company management's push for the bottom line and the plan's obligation to protect participants clearly compromise safe and sound pension practices at many companies.
Worse still, current law allows a plan’s real financial condition to be kept secret from workers and investors. This failure of accountability and transparency has eerie similarities to the Enron debacles, where CEO’s were able to jump ship without even alerting rank-and file employees the ship was going down.
Today, Congressman Lloyd Doggett and I will introduce legislation to open up these reports -- referred to as 4010 forms --to public scrutiny. There must be transparency and accountability for billions of dollars promised to hard-working employees. The Administration now says it supports publication of these secret reports. Mr. Chairman, I hope that you will support us in this effort.
As overdue as this hearing is, it is still an important one for our committee and for Congress. But it will be meaningless if the recommendations for change that will be discussed today are ignored and Congress opts instead for a quick fix that will likely mask and then deepen the problems with unfunded private pensions.
In July, the Ways and Means committee and the Administration proposed to scrap the 30-year treasury rate as an index for calculating the interest on future pension liabilities. They propose we jury-rig a new formula that by one estimate will cut pension contributions in their first three years by some $50 billion annually.
I am very concerned about this approach. I am concerned that it will drive pension deficits higher. It was devised without the input of the PBGC and without an understanding of how it would impact the PBGC and its rising deficit. It was devised without an understanding of what it would mean for the future of premium contribution hikes and liability claims. And it was devised without telling the taxpayers whether it will put them on the hook for billions of dollars of catastrophic claims the PBGC can’t pay.
And even more irresponsibly, the backers of this approach are urging Congress to support their proposals without addressing the real causes of pension underfunding detailed by the GAO.
In mid July, I requested the PBGC to provide me a detailed analysis of these proposals. I specifically asked what effect these proposals would have on short-and long term pension underfunding, on PBGC's $3.6 billion deficit, and on the premiums required to fund PBGC’s operations. The PBGC doesn’t have a clue.
It appears that no one from the Administration ever asked the PBGC to look at this before it made its proposal. I was promised this information for today’s hearing, and we still don’t have it. I think this committee should be very concerned that this Administration appears to have not done its homework when billions of hard-earned retirement benefits are at stake.
The Administration must stop its dithering and get serious about pension reform.
Its neglect of the manufacturing industry and mismanagement of the economy has resulted in devastating job losses for millions of employees, and now threatens the nest eggs for millions of Americans. Creating one new job in the Commerce Department is hardly an adequate response. Its blind eye to the effect of baby boomers retiring in the next 10 to 15 years, to chronic underfunding of plans, and to exploding PBGC deficits is negligent and irresponsible.
The American people’s anxiety about the future of their retirement security is highly justified in light of this Administration’s failure to seriously address the problems in our pension systems. The Administration and this committee have an obligation to get serious on retirement security and develop real solutions that will do more than paper over critical pension underfunding.
This is way overwhelming for my small brain that does not comprehend money. I have read and reread and this material requires an expert to interpret.
I'll avoid dialogue and just say why I believe the pension is a good idea for me in my status.
I am a woman that is concerned about reaching age 50. The fact that I am not feeling confident in my ability as a woman to continue to perform manual labor much longer is the reason I want a pension plan that has similar benefits as the police and fire fighters. They aim to retire at 50 years old. Some places only require 20 years. I would be retired now if I had been on a 20 year plan.
All my career I have believed that we would someday be regarded and valued members of society that would have a retirement program for us at a reasonable age. I am coming close to that age. How many of us need to go out on disability or be forced out of our job we love before we start to do what is right for ourselves and make the stance to insure we will have a career that ends with a retirement the way our fellow emergency service workers do?
