Much has been written about the whole pension funding crisis and, with the Bush administration’s proposal discussed here yesterday, came a front page article from the Wall Street Journal–“Firms Had a Hand in Pension Plight They Now Bemoan: Relying on Arcane Rules, Some Have Drawn Down Assets for Corporate Purposes: Now, Asking Congress for Relief.” The article is critical of companies which the Journal says have “siphoned off billions of dollars in assets from their pension plans” using the “cash to pay for retirees’ health coverage, the costs of laying off workers and even fees to benefits consultants.” The article is also critical of “benefits consultants” which it says have “guided companies through the labyrinth to find ways to tap the huge pension surpluses the bull market wrought.”
My thoughts on the subject:
- During the early 80’s when pension plans had large surpluses, many companies terminated their pension plans to access the surpluses which they then used for various purposes. The surpluses had to do largely with plan investments outperforming actuarial assumptions, but the terminations caused an outcry in the public. As a result, Congress passed a law creating an excise tax on reversions so that companies could no longer terminate their plans and receive back the excess without paying a penalty on the reversion. So what some companies have done, as I have seen through the years, is enhance the benefit formula under the plan to use up the surpluses, i.e. giving bigger benefits to employees. However, now due to the bear market and low interest rate assumptions which affect pension funding, many of these plans with enhanced benefits are now underfunded.
- Also, those companies maintaining a defined benefit plan are becoming fewer and fewer. Many companies have moved to 401(k)s where employees are asked to fund a good part of their own retirement. Many companies with underfunded pension plans have chosen to simply freeze the benefit formula entirely and wait for the stock market to recover so they can terminate the plan and be done with it. It seems to make sense to me, where a number of conditions have converged to make these types of plans so difficult to maintain, i.e. the bear market and extremely low interest rates–that it would behoove us to come up with a way–within reason, of course–to ease the funding situation in order to encourage companies to continue to maintain these types of plans. Otherwise, companies will continue to bail out of them, employees will be left with their 401(k)s, and defined benefit plans may become extinct like the dinosaur.
- The whole actuarial funding arena has never been an exact science anyway. Assumptions are made which may or may not prove true. While it would have been wise for companies to look ahead and foresee that difficult economic times could come as they have, who could have predicted 9-11 and the massive accounting scandals which have swept our nation in the past couple of years? Certainly, some companies should be applauded for making it through these difficult times with overfunded plans (you can read about the few here), but the rest–those with underfunded plans–I’m afraid are in the majority, and in the same predicament as the rest of the world.
- If Social Security is really not going to be there for baby boomers and Gen-Xrs when they retire, as so many are predicting, we need to do everything possible to encourage companies to continue their retirement plan programs, and quit acting like companies have to provide these benefits–they don’t. Just as Microsoft abandoned its stock option program in favor of outright grants of restricted stock, so too might companies in the future decide to abandon their retirement plan programs altogether, in favor of cash bonuses to employees, who would then be expected to provide for their own retirement. And based on information one can read about how poorly the average American performs in the area of saving for the future, that would be a precipitous path for our country to embark on.