IMHO: Reality "Check?"

It's hard for plan sponsors to catch a break in the headlines these days.

The most recent pummeling was contained in  yesterday’s online edition of the Wall Street Journal , where Ellen Schultz manages (again) to find fault with cash balance programs.   Schultz so routinely beats THAT drum it would be laughable, if it weren’t so consistently one-sided.  

Conspiracy Theories

However, this time she has managed to concoct what can only be described as a vast conspiratorial tapestry on the part of employers (and their consultants) to gorge themselves on the pensions of hard-working Americans.

“Over the past decade, U.S. companies have siphoned off billions of dollars in assets from their pension plans. They’ve used the cash to pay for retirees’ health coverage, the costs of laying off workers and even fees to benefits consultants,” says Schultz in her most recent account.

She then goes on to admit, “All of these maneuvers were legal,” but cautions that they were “…grounded in arcane and little-known provisions of U.S. pension law, and buried in the minutiae of corporate filings.”

Arcane Provisions?

So, what are these “arcane and little-known provisions” that have been so surreptitiously employed?   Well, in addition to creating cash balance plans, they have apparently been using pension assets to fund early retirement benefits.   Granted, it’s hard to warm up to the idea of massive corporate layoffs, but when workers lose their jobs, it’s hard to imagine a system that wouldn’t sanction paying them their vested retirement benefits.  

Not only that – providing workers the option of taking their vested benefit as a lump sum also carries a double whammy – for workers.   According to the WSJ article, it not only shortchanges the worker (by “stripping out” early retirement subsidies the worker wouldn’t have been entitled to unless they actually took early retirement), it also drains chunks of money from the pension plan all at once, rather than spreading it out over time (putting the rest of the pensioners at risk – as though employers don’t take the obligation seriously).   As if that were not enough, the WSJ notes that because the pension plan is ultimately paying out less than it would have otherwise, the strategy actually also serves to boost the corporate bottom line.  

Medical Attention

The article also charges employers with using surplus pension assets to fund retiree medical benefits.   For a decade now, employers have been forced to recognize these retiree medical benefit liabilities on their balance sheet.   However, unlike pensions, employers have no real ability to prefund the obligation.   Consequently, these are liabilities in every sense of the word – and in the wake of the soft economy and relentless soaring health-care costs, a growing number of employers have dropped or significantly curtailed these programs.   Employers have been given a small window to provide funding (within strict limits) to these retiree medical programs from pension plan surpluses (yes, surpluses) – and, despite Schultz’s criticism, there is little doubt that the ability to do so has extended the life of some of these programs at a critical time for employers and retirees, alike.

One must acknowledge that the rules that govern our industry are arcane – at best – certainly the ones that set standards for funding and accounting.   And there is no question that the items noted in the WSJ article have contributed to a depletion of the assets in many pension plans – particularly in an economic and market downturn that has gone on much longer than anyone might reasonably have anticipated.  

After a quarter-century trying to navigate these waters, one can appreciate how difficult it is for those who stand on the shore to chart a course – and I certainly don’t have any magic cure.   But you don’t have to be an actuary to appreciate the following:   the biggest problem confronting the nation’s private pension system today is the record low interest rate environment, and how it is imposed on our pension calculations.   The system doesn’t need artificial relief, just a restoration of reality.

Woozy Times?

When times were flush, we all got a little woozy with all the “extra” money lying around (including the decision to quit issuing the 30-year Treasury, which, given its central role in many of these pension calculations, has contributed more to the nation’s pension troubles than all the items noted in the WSJ article by a huge factor).   Given the time periods involved, even small shifts in those rates carry enormous consequences – both good and bad – for the perceived viability of pension programs.  That’s why the current discussions about ways to craft a viable, realistic, dependable interest rate bogey are so crucial to the survival of the private pension system.

What would also help is an awareness that these long-term pension obligations are not 30-year bonds callable on a moment’s notice.   Would people actually buy houses if they believed that the bank could descend on them at any moment and demand full payment – and evict them if they could “only” come up with 75%?   Why do we expect that employers will continue to support pension plans under that kind of scrutiny?  

No, what we all really need at the moment is some clarity – some certainty – and a little less finger-pointing.   We’re in the middle of a typhoon here, and the last thing we need is people on the shore complaining that they’re getting wet.