Benefits November 17, 2003

Mellon Survey Disputes Cash Balance Presumptions

November 17, 2003 (PLANSPONSOR.com) - Seven out of 10 cash balance conversions either maintain or increase total employer costs, according to preliminary results of a Mellon survey.
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This finding flies in the face of cash balance opponent contentions that employers are frequently motivated to pursue conversions to the controversial hybrid pension from traditional defined benefit plans conversion in an effort to save on the total cost of employee pensions. The Mellon data, which took into account the shifting of costs to other retiree programs such as 401(k) plans, also found that all but nine of 157 cash balance plans canvassed were the result of a conversion from a traditional defined benefit plan, according to a preliminary release of data from Mellon’s 2003 cash balance survey.

Much of this increased cost could be in the protections provided to older and middle-age workers’ pensions. Again, contrary to popular belief, the Mellon survey found workers with the most tenure in a traditional defined benefit plan are given protections that go beyond those that are provided when a plan terminates. In fact, 80% of the conversions to cash balance plans included transition approaches that included:

  • supplemental transition pay credits
  • continuing the prior plan benefit formula, either automatically or upon election
  • providing benefits based on the greater of the cash balance and prior benefit formulas.

Additionally, Mellon found the vast majority of conversions includedopening balances that were based on the present value of employees’ accrued benefits under the prior benefit formula as of the date of conversion. To determine these opening balances, companies apply interest rates that are generally reflective of the level of market rates at or shortly before the conversion date, but for three-quarters of those plans providing an opening balance, the rate used was no higher than the range of 30-year US Treasury bond rates in the nine-month period before the conversion date.

Mellon also found a potential for cash balance plans to provide retirement benefits to shorter-service, lower-paid employees. This is due to cash balance conversion formulas providing proportionally more benefits to lower paid workers through elimination of “Social Security integration.” While 73% of the plans before the conversion took into account Social Security benefits directly or indirectly, only 36% of the ongoing cash balance formulas are integrated with Social Security.

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