The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.Last week, I ripped into Blackstone's Tony James and his solution to America's retirement crisis and followed up with a comment looking at why there shouldn't be four or more views on DB vs DC plans but only one view which clearly explains the brutal truth on DC plans.
The deal could affect any pre-retiree in a former employer's pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.
Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.
The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company's pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.
An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.
More lump-sum deals aren't good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren't at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.
Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. "This has nothing to do with pension policy, but is simply a device to raise revenue," said Towers Watson's Glickstein. Higher premiums "would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it's kind of ironic."
A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was "outraged." Its Oct. 27 statement quoted the committee's president as saying that "even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”
In response to the criticism, an Obama administration official spoke with Bloomberg BNA's Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC's single-employer program, "the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company's annual pension contribution and a tiny fraction of total compensation costs." The official noted that the increases take effect over three years to allow companies to plan for the new costs.
This week, Congress and the Senate just passed a budget and debt deal that they'll be sending to President Obama which will make it harder for companies to offer defined-benefit pensions. And this is all happening less than a year after Congress effectively nuked pensions.
What is going on in the United States of pension poverty is a real travesty. I call it the quiet screwing of America where corporations flush with cash buy back their shares to pad the outrageous compensation of their top brass while they put off hiring and much needed investments and now Congress made it easier for them to justify their decision to cut defined-benefit plans for their employees.
Not surprisingly, both Democrats and Republicans joined forces to pass this bill, which goes to show you when it comes to corporate interests, there's no divisive politics, just a bipartisan, unified front to pander to their corporate and Wall Street masters.
This week I learned that some 8,737 UPS retirees could soon see their pension checks cut as they receive their pensions from the cash-strapped Central States Pension Fund (see my previous comment on Teamsters' pension fund). A month ago, CBC reported that employees of the decommissioned Hub Meat Packers in Moncton will see their pensions slashed by as much as 25 per cent.
In an equally disturbing example, the Washington Post reports on how military veterans are scrambling to sell their pensions through pension advance schemes in an effort to make ends meet, a huge mistake which will squeeze them into pension poverty.
Meanwhile, according to a new study, the 100 top U.S. CEOs have as much saved for retirement as 50 million Americans, thanks in large part to special savings plans that their employees don’t receive:
The Center for Effective Government found that the 100 biggest nest eggs of corporate chiefs added up to $4.9 billion, or 41 percent of what American families have saved for retirement. David Novak, the former CEO of Yum Brands, the company that owns Taco Bell, Pizza Hut and KFC, had the largest nest egg, worth $234.2 million, or enough money to provide an annuity check of about $1.3 million a month starting at age 65.This is the new pension normal, companies are looking to slash pension costs, offloading them to insurers or employees, or if they go belly up, pensions become the problem of some cash-strapped government pension agency which backstops pensions and slashes benefits.
By contrast, almost three in 10 Americans approaching their golden years have no retirement savings at all, the study said, and more than half between 50 and 64 will have to depend on Social Security alone, which averages $1,233 per month.
Aside from fatter paychecks, CEOs get two other perks to help them grow their retirement funds faster than their employees can. Companies and business groups argue that CEO retirement packages are tied to executive performance and necessary to be able to attract top executives.
Special Pensions
More than half of Fortune 500 CEOs receive supplemental executive retirement plans (SERPs), a type of tax-deferred defined-benefit plan for the C-suite. These plans have come under heat from shareholders as expensive and unnecessary.
CEOs enjoy these plans even as companies eliminate regular defined-benefit plans for employees. Only 10 percent of companies provide defined-benefit pension plans, covering just 18 percent of private sector workers, according to the Bureau of Labor Statistics. In the early 1990s, more than a third of private sector workers had pension plans.
Executive Tax-Deferred Compensation Plans
Almost three-fourths of Fortune 500 companies offer their senior executives tax-deferred compensation plans. Unlike 401(k) plans offered to regular workers, these special plans have no limits on annual contributions. That allows CEOs to invest a lot more in their retirement than everyday Americans. For example, last year, 198 CEOs running Fortune 500 companies were able to invest $197 million more in these plans because they were not hamstrung by limitations on defined compensation plans, the study found.
American workers over 50 can contribute only $24,000 a year to 401(k) plans, while younger employees have an $18,000 limit.
While this is going on pretty much everywhere, at least in Canada there's talk of enhancing the Canada Pension Plan. In the U.S., there's a dangerous shift in pension policy which will come back to haunt the country as social welfare costs skyrocket and pension poverty soars, placing more pressure on an ever growing debt problem.
What is the solution to the U.S. retirement crisis? I stated my thoughts last week when looking at the DB vs DC debate:
In short, I believe that now is the time to introduce real change to Canada's retirement system and enhance the CPP for all Canadians.You'll forgive me if I keep beating the same drum on this topic but it's absolutely crucial that policymakers around the world get their pension policy right.
I'm also a big believer that the same thing needs to happen in the United States by enhancing the Social Security for all Americans, provided they get the governance right, pay their public pension fund managers properly to manage the bulk of the assets internally and introduce a shared risk pension model in their public pensions.
It's high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).
And some final thoughts for all of you confused between defined-benefit and defined-contribution plans. Nothing, and I mean nothing, compares to a well-governed defined-benefit plan. The very essence of the pension promise is based on what DB, not DC, plans offer. Only a well-governed public DB plan can offer retirees a guaranteed income for the rest of their life.
What are the main advantages of well-governed DB plans? They pool investment risk, longevity risk, and they significantly lower costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.
In short, there shouldn't be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.
On Friday morning, I received an email telling me that the Canada Mortgage and Housing Corporation (CMHC), a major Canadian Crown corporation, was reverting back to defined-benefit plans for all their employees after shifting new employees into DC plans back in 2012.
The person who sent me that email is a pension authority who shared this with me: "Hopefully, some others will come to same conclusion that a risk shared DB is the most cost effective way to provide a secure retirement and will follow their example."
He's absolutely right which is why I'm hoping to see Canadian and U.S. policymakers move toward enhancing and bolstering defined-benefit plans for all their citizens (see my last comment on breaking Ontario's pension logjam).
Lastly, I discussed inequality in a recent comment of mine looking at which bond bubbles worry the Fed. I think it's shameful that our society values overpaid hedge fund managers and CEOs and does little to fight for the rights of our most vulnerable, including the poor, the disabled and the elderly who are increasingly confronting pension poverty.
Below, take the time once again to listen to this classic 2003 exchange between then congressman Bernie Sanders and Fed Chairman Alan Greenspan. Unfortunately, over a decade since that exchange, the quiet screwing of America continues unabated and both Republicans and Democrats are to blame.