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The Future Does Not Look Bright for Pension Plans

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While employer utilization of pension plans have been in decline for some time now, organizations received extra incentive to move off their long-term responsibility.

On March 6, the U.S. Treasury Department issued a notice that will allow employers to buy out current retirees from their pensions with a one-time lump sum payment. In doing so, it reversed its 2015 guidance that banned the practice of lump-sum payments after officials determined it shortchanges most seniors.

Pensions, which are insured by the federal Pension Benefit Guaranty Corporation in case employers go bankrupt, cover 26.2 million people across more than 23,000 single-employer plans, but companies aren’t offering them to their new hires.

Furthermore, organizations are increasingly undergoing efforts to decrease their risk profile when it comes to pension plans. One way is that organizations are handing off their pension plan obligations to insurance companies. Another is offering deferred vested participants — those who are previous employees of a company that are still entitled to future benefits — a lump-sum payment for a benefit that’s not payable until sometime in the future.

So, what does this mean for the future of these defined-benefit pensions?

Elliot Dinkin, CEO and president at Cowden Associates Inc., said there are three main groups of employers when it comes to pension plans. The one area that is staying in the pension business as of now are single employers, multi-employers, governmental and those that are involved in unions, because it’s still meaningful to what they do.

“They will continue to make decisions on how to manage their liability, including de-risking strategies,” Dinkin said. “They will take steps from time to time to take volatility out of the plan and manage the liability, because this is managing retiree debt.”

There’s a second group that have determined that a defined-benefit pension plan isn’t strategically in their best interest. Dinkin said these organizations, rather than liquidating the entire program, are essentially doing so in pieces as a form of de-risking.

“They’re not using it to attract, retain or motivate people any longer, so they have frozen their pension plans, meaning that there’s no more additional accruals and their ultimate goal is to figure out how to best manage that remaining debt,” Dinkin said. “They’re trying to do that as quickly and efficiently as possible, because it’s no longer a strategic asset.”

Lastly, there’s a group of plan sponsors that has frozen the pension plan and are no longer managing it. “They are just sort of letting it sit out there and aren’t sure what to do,” Dinkin said.

Jan Jacobson of the American Benefits Council said the Treasury pointed out in its notice that they will continue to study the issue of retiree lump-sum windows, which means this most-recent notice isn’t necessarily the end of it.

While plan sponsors will now have the option to provide a lump-sum payment, retirees aren’t obligated to take it. But the option exists, for now.

“You’re still a fiduciary of the pension plan, so you have to make sure you take the proper steps and make sure you did all the right communications and everything else and who knows if sometime in the future the IRS might change its mind again and eliminate this feature,” Dinkin said. “You still have to have all the other things in line, but there will be some plan sponsors and some retirees who will be interested in the lump sum. This gives them that opportunity, but whether that continues forever, I don’t know.”

PENSION PLANS ROUNDUP

A Blow to Pension Plans

CNN’s Lydia DePillis writes that traditional pensions were already in decline and that the federal government has potentially expedited that process by making it easier for employers to get rid of them. DePillis’ article hits on how there’s been a rise in lump-sum buyouts because it absolves employers of risk and how this would be a losing deal for retirees.

An Ominous Future

Defined benefit pensions started to become less common in the 1980s during the Reagan administration. Tyler Bond of the National Public Pension Coalition cites the statistic that private-sector workers with a defined benefit pension dropped from 88% to 33% from 1975 to 2005. Using a Washington Post article as a reference, Bond details how families have been negatively impacted later in life by the loss of pensions. 

Underfunded Pension Plans

Estimates of unfunded municipal pension liabilities are approximately $1 trillion, writes Elliot Dinkin in this Workspan Daily article. Dinkin writes that while no one has the exact answers, there are a few potential solutions to the problem.

Time for a Federal Change?

In this column for the Federal News Network, Jeff Neal addresses the Trump administration’s 2020 budget proposal that has significant changes in federal employee retirement programs. Neal writes that the knee-jerk reaction to any kind of retirement system change is to say no, but he believes some of the proposed changes are worth considering.

UK Pensions Lower Than Forecast

Nick Reeve of IPE writes about how a court ruling requiring UK pension funds to equalize legacy pension benefits for men and women will likely raise total liabilities by more than $9 billion. Reeve said the ruling means defined benefit schemes must revisit decades worth of data to identify those who are due back payments, which is a process that won’t be finalized for several years.

About the Author

Brett Christie is a staff writer at WorldatWork.


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