Developed by PricewaterhouseCoopers (PwC), it’s called Pension Preservation Plus (PPP), and is described as a combination of a defined benefit plan and a defined contribution plan. According to Sheldon Gamzon, a principal, retirement practice, of the PricewaterhouseCoopers Human Resource Services division, based in New York City, the defined benefit portion of the design provides annual pay credits, just like a traditional cash balance plan. However, the interest credits, rather than being earned in the defined benefit plan, are instead credited to a defined contribution plan as a discretionary employer contribution.
Gamzon notes that the PPP design was developed a few years back for a particular client, but was effectively put on the back burner until a couple of years ago – after slumping asset values, movements in interest rates, and the new requirements of the Pension Protection Act of 2006 (PPA) combined to put additional pressures on pension funding.
Gamzon notes that with the deep dive in the markets, and in the middle of a very soft economy, many employers are confronted with the need to provide additional funding to their pension plans at a time when they can least afford to do so. He claims that the PPP design, while not ultimately changing the pension funding obligation itself, can serve to provide a program with additional funding flexibility in the short term.
Today retirement benefit costs, especially pension costs, are a major expense to many US companies. Gamzon notes that many major US companies have either frozen, or are considering freezing, their defined benefit pension plans, in some cases replacing those future benefits with an enhanced 401(k) benefit. “Although “freezing” defined benefit pension benefits can be an effective way to reduce cost volatility, this strategy may leave employees without an adequate retirement safety net and result in some adverse human resources and public relations issues,” according to PwC. Gamzon notes that, in talking with chief financial officers (CFOs), what really bothered most of them wasn’t the cost of a defined benefit (DB) plan, “because they know that, over the long term, DB is most efficient way of delivering retirement benefits. What scares them is that the number that the actuary gives them in July is obsolete by September,” he explains.
Additionally, there are many who are concerned about their workers' ability to manage their 401(k) plans "effectively", certainly in a way sufficient to provide lifetime retirement benefits, especially as life expectancy rates continue to rise.
Simplistically, the design feels much like a cash balance arrangement - in fact, Gamzon describes the conversion from cash balance as the "low hanging fruit". However, unlike a cash balance plan, which has the imbedded need to fund both the annual DB contribution and an annual interest credit, the PPP only calls for the DB contribution - the annual credit to the participant account is made in the form of an annual, discretionary profit-sharing/defined contribution. That not only provides more flexibility in the funding formula - at least during the next several years, PwC says that, compared to either a similar defined contribution or similar defined benefit plan, the cost of the PPP arrangement is estimated to be 30% to 40% less for the first 15 years, while still retaining the safety net for employees (the cost after the first 15 years will be a function of plan design and demographics, according to PwC).
Gamzon says that the conversion from a traditional DB plan to the PPP is comparable to converting to a cash balance plan, while conversions to PPP from a DC-only design, while they have been contemplated, have not yet been consummated (in the same way that one really doesn't see many DC plans converting to DB).
As for the types of programs most likely to find the PPP design attractive, Gamzon says that it works best for employers that are growing, that expect to grow in the future, and that perhaps as a result have a younger workforce demographic. "The younger the organization demographic, the more appealing," he says. Another prime candidate is companies that have a large unfunded liability, and need the short-term relief in the current tough economic environment.
Asked to identify companies that have adopted the PPP design, Gamzon is able to name only one firm - Anixter International Inc., which has expressed a willingness to make that decision public. However, he says that there are a few more that have already been adopted by corporate boards (though the employee communications haven't yet been finalized. He says he is working on 6-8 of these himself - firms that he describes as "household name" companies.
Those interested in more information on PPP can contact Sheldon Gamzon directly at Sheldon.email@example.com
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