Featured Topics
Retirement Industry
Magazine Archive
Education/Advice
Where Do you Go for Financial Advice?
What is the point of all this? DB plans present a radical opportunity for abuse. Their lack of transparency seems to present an irresistible temptation to underfund and overpromise. Irresistible at least where there is no system of accountability and where a politician is rewarded (with votes) for providing benefits to constituents (state employees/voters) that are paid for by unrealistic assumptions. And neither these politicians—who are now long gone, although some of them are in prison for other irresponsible and corrupt activity—nor the actuarial “scientists” who came up with the unrealistic assumptions, will be held accountable for the disaster that they have is perpetrated. All of this is not some technical budgetary problem. This abuse of DB plan funding—this conspiracy of politicians and those who serve them—makes up 80% of total state debt. The Chicago Tribune reports that Chicago Mayor Rahm Emanuel singles out this one thing, this pension “overhang,” as “deter[ring] businesses from locating in Chicago: Companies don’t want to buy shares in a phenomenal tax burden that will unfold over decades.” No kidding. And Illinois’s problem with pensions is just a smaller version of what is happening in many other states (California comes to mind) and in many other countries (such as Greece and France). In the corporate world, this DB plan unaccountability has, over the last 40 years, been wrung out of the system. Corporate plan sponsors are now forced to use realistic assumptions and to fund on a reasonable basis. And, in the process, most of the DB plans have been wrung out of the system, too. Are DB plans a dead end? Maybe. Traditional DB plans—“pension” plans that target replacement income—start with the adequacy of the benefit, rather than with what a company (or a state) can afford and what participants want. Account-based (defined contribution and, to a large extent, cash balance) plans are much simpler and more transparent. They make the reconciliation of a company’s and participants’ capabilities and preferences much more explicit and thus more efficient. And they do not create unfunded liabilities. I remain open-minded about traditional DB plans, but one has to wonder just what ongoing role they might possibly have. Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has had 30 years’ experience in the benefits field, law and consulting firms.
What is the point of all this? DB plans present a radical opportunity for abuse. Their lack of transparency seems to present an irresistible temptation to underfund and overpromise. Irresistible at least where there is no system of accountability and where a politician is rewarded (with votes) for providing benefits to constituents (state employees/voters) that are paid for by unrealistic assumptions.
And neither these politicians—who are now long gone, although some of them are in prison for other irresponsible and corrupt activity—nor the actuarial “scientists” who came up with the unrealistic assumptions, will be held accountable for the disaster that they have is perpetrated.
All of this is not some technical budgetary problem. This abuse of DB plan funding—this conspiracy of politicians and those who serve them—makes up 80% of total state debt. The Chicago Tribune reports that Chicago Mayor Rahm Emanuel singles out this one thing, this pension “overhang,” as “deter[ring] businesses from locating in Chicago: Companies don’t want to buy shares in a phenomenal tax burden that will unfold over decades.” No kidding.
And Illinois’s problem with pensions is just a smaller version of what is happening in many other states (California comes to mind) and in many other countries (such as Greece and France).
In the corporate world, this DB plan unaccountability has, over the last 40 years, been wrung out of the system. Corporate plan sponsors are now forced to use realistic assumptions and to fund on a reasonable basis. And, in the process, most of the DB plans have been wrung out of the system, too.
Are DB plans a dead end? Maybe. Traditional DB plans—“pension” plans that target replacement income—start with the adequacy of the benefit, rather than with what a company (or a state) can afford and what participants want.
Account-based (defined contribution and, to a large extent, cash balance) plans are much simpler and more transparent. They make the reconciliation of a company’s and participants’ capabilities and preferences much more explicit and thus more efficient. And they do not create unfunded liabilities.
I remain open-minded about traditional DB plans, but one has to wonder just what ongoing role they might possibly have.
Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has had 30 years’ experience in the benefits field, law and consulting firms.
PLANSPONSOR staffeditors@plansponsor.com