The report said that, if the initiatives currently being considered by the Financial Accounting Standards Board (FASB), the US Treasury, and the Pension Benefit Guaranty Corporation (PBGC) are passed, approximately 50% of major U.S. corporations are likely to reduce pension benefits currently covering 35 million workers and retirees, putting additional pressure on the U.S. Social Security system to make up the difference.
The report, “The U.S. Pension Crisis: Evaluation and Analysis of Emerging Defined Benefit (DB) Pension Issues,” analyzes proposed pension initiatives and evaluates the possible impacts. To compile the report, CIEBA talked with its members, representing almost $500 billion in pension fund assets, on how their plans were designed and functioning currently, and how they anticipated their plans would change if the initiatives do get passed.
The CIEBA study found that:
- Approximately half of the surveyed plan sponsors indicated that freezing accruals to existing participants or freezing entry by new participants was a possible or very likely response to the pending initiatives.
- Three-quarters (75%) of CIEBA members surveyed would make a significant change in their asset allocation, principally by lowering long-term equity holdings and re-investing the proceeds in fixed income securities, increasing pension costs and reducing benefits for millions of participants.
“Proposed changes could make defined benefit plans much more expensive, hamper benefit delivery and reduce long-term benefits,” said T. Britton Harris, CIEBA vice chairman and president of Verizon Investment Management Corporation.
In a second component of the study, CIEBA asked experts from institutions including Goldman Sachs, Morgan Stanley, Bridgewater, and Hewitt, to analyze what they expected the potential impact of the proposed initiatives on retirement security and the US economy as a whole would be. These responses included:
- An estimated decline of 8-12% in the stock market, representing asset flows of between $250 and $650 billion out of the U.S. equity market.
- A reduction in real GDP growth by 0.3-0.5% per year between 2005 and 2007.
- A short-term loss of between 290,000 and 440,000 jobs.
- Several of the emerging issues, including the elimination of smoothing of asset values and funding requirements, also contribute to greater volatility both of corporate earnings and year-to-year funding requirements.
The full CIEBA report is available at www.AFPonline.org/pensionreport .
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