SURVEY SAYS: Will the Pension Fix Work?
In view of the newness and complexity of the topic, one might well expect a certain caution on the part of this week’s survey respondents – and there was certainly some of that. More than 28% , in fact, said that it was simply too soon to have an opinion on the matter, including one reader who said, “The devil is in the details, so that’s a ‘too soon to tell.’ However, the seriousness of the issue means that I’ll be meeting with my federal representatives shortly .”
Roughly 18.75% said that it was about time for such an initiative, while half that number said it was “too little, too late.” In the former category (but leaning toward the latter) was a reader who observed, “I don’t like the thought of higher premiums for many of my clients, most of whom pose little risk to the financial well-being of the PBGC. I’m afraid that a combination of the PBGC, Financial Accounting Standards Board, and the IRS have all contributed to the potential demise of the retirement system.” Slightly more than 3% said they hadn’t yet turned their attention to the matter.
While survey respondents are notoriously hard-pressed to work within the confines of the multiple-choice question format (not that I’m complaining), a whopping 41% of this week’s respondents chose “other” (which, admittedly is one of the choices….do I know you guys, or what?). “Other” was hardly a monolithic category, however – and it was the category in which some of the more “colorful” responses appeared. One reader summed up the opinion of many, noting, “… why even bother reading up on it until it actually becomes law? With such a contentious house and senate, there’s no way something Bush has proposed will either survive, or make it to law without any changes. I’m so tired of political hacks trying to ‘look good’ by proposing legislation that often lacks common sense. So, I try to avoid even reading about proposed legislative changes until I absolutely have to in order to ensure our plans are in compliance.”
Another said the “solution” was “Trying to fix a primarily ethical issue with money,” going on to say, “It just won’t work. I have spent most of my last 30 years working with employers who had large DB plans, some of whom tried to do the right thing. They funded their plans with the end in mind and with a social consciousness about who they were trying to protect with these programs. But when put to the test, when times got difficult and companies, whose main business was not delivering pension promises, began to experience financial difficulties, one of the places to find relief was the large DB pension fund.”
Another reader who claimed to be “hopeful, but deeply skeptical,” went on to say, “I am trying hard to believe, but everything dealing with DB plans that has come out of Washington for the last 20 years has been to their detriment. I am not sure that we can stand any more ‘help.'”
Another fretted, “By raising liabilities, eliminating smoothing, requiring companies to disclose funding on a termination basis, and increasing PBGC fees, my prediction is that more companies will get out of the game and dump their plans on the PBGC – exactly an outcome that this proposal seeks to avoid. Furthermore, the financial situation at the PBGC is not as bad as they have made it seem – $17 billion of their reported $23 billion has yet to be assumed, it is on their list of ‘probables’.”
Another put it even more succinctly, noting “(f) sure – let’s encourage even more employers to drop their DB plans.”
However, this week’s Editor’s Choice goes to the reader who wondered, “Gee wouldn’t it be interesting if the government held Social Security to the same funding standards that are required for private pension plans?”
Thanks to everyone who participated in our survey!
The devil is in the details. So that's a 'too soon to tell'. However, the seriousness of the issue means that I'll be meeting with my federal representatives shortly.
Well, it's better than nothing.
* Funding rules do need to be strengthened & simplified. I wonder what will survive the political process?
* The increase cost for participant coverage makes some sense, but I wonder how much (sense, not cost)?
* Charging "underfunded" plans based on their funded status will result in roulette behavior - it will encourage sponsors to assume more risk whether more risk is justified or not. If this is what the PBGC wants, fine, but I doubt it's what they want.
In response to your survey: (f) Sure - let's encourage even more employers to drop their DB plans.
Probably answer (d) too soon to say.
It is an interesting start, especially the general sentiment of
* Make liability measures simpler.
* Stronger funding requirements.
However, it appears to miss several points:
* Why should deficits be funded over 7 years? Why not 1 year?
(However, this might be a reasonable approach to dealing with levels of current underfunding, as long as it is not extrapolated to future underfunding.)
* Raise the PBGC base premium to $30?! Nonsense! This would tax successful companies and plans to subsidize others. The strong plans and companies did not create the PBGC deficit, and they should not be expected to pay for it. Since the DB system is voluntary, this will encourage more plan sponsors to leave. A better approach might be to reduce the base premium, and increase the variable premium, with some short-term relief if the sponsor is funding its current deficit to eliminate is within X years (perhaps 7). In addition, let's modify the premium structure so that it evaporates if the plan maintains a certain minimum level of funding.
We are very concerned.
(1) The Administration says they want to reduce volatility, but if market assets and liabilities are used, without smoothing the contribution, or having a credit balance, then contribution will be volatile, and employers will get out.
(1a) it is unclear if amortization is 5, 7, or 10 years.
(1b) Plans must fund to ABO using past experience (which may not be accurate), with increased funding when they get sick. I think this will cause lots of volatility at the worst time, so even healthy employers will fear getting sick and will want to drop their DBs.
(1c) that may not help the PBGC enough, because it will be too late to fund the greater costs of early retirement subsidies and shut down benefits. Strong companies will be happy when they are strong. Just like they liked DRC until recently when it started affecting them.
(2) They say they are for simplification, but use yield curve. If it still has 90-day smoothing, then it's not great for hedging either.
(3) Benefit administration will be a mess, unless they have smoothing on the thresholds for benefit freezes. Otherwise, benefits could be on, off, on, off, etc.
(3a) Will they allow benefit increases if security provided?
(3b) there will be runs on bank if workers think that lump sums will be eliminated. It needs to be gradual, or require it be replaced by 20 C&C, or eliminate if funding ratio below 100%.
(4) Risk-related premiums will be volatile (e.g., in years when lots of plans terminate), and increase at worst time for sponsors (Note: being sick is not under their control). I didn't see anything on risks related to stocks, but without contribution smoothing, employers will be nervous about having 60% in stocks anyway.
(5) Pre-funding up to FFL or 130% of ABL is good, but many employers won't do it, because they did not relax reversion or even transfer rules. They also don't require funding of any margin.
(6) Good improvements in disclosure
(7) Allows PBGC to perfect lien in bankruptcy. May be difficult to get thru Congress
(7a) Due to freezes, PBGC should be willing to work out financing with employers and reduce distress terminations.
(8) For Cash Balance conversions, are they encouraging Harkin A + B plus 5-year maintenance? Ugh.
(8a) I think Treasury proposal fixes whipsaw and accommodates greater of and choice.
(9) ERSAs: Ugh.
(10) Will investment advice be allowed from someone with a conflict (as long as disclosed along with fee)?
(11) Is that the rolling 3-year ability to get out of company stock?
(f) Other
Gee wouldn't it be interesting if the Gov't held Social Security to the same funding standards that are required for private pension plans? Then it would have to be fully funded.
Answer (b) too little too late. The Bush Administration in the first term was only concerned about reelection. Now that he doesn't have to worry about that, he can propose policy that can secure pension systems. I don't trust Washington politicians to seriously deal with this mess.
It's not just this pension issue either. Health Insurance, the tax code and other structural problems are killing businesses and crippling state and local governments.
f) Trying to fix a primarily ethical issue with money. It just won't work.
I have spent most of my last 30 years working with employers who had large DB plans, some of whom tried to do the right thing. They funded their plans with the end in mind and with a social consciousness about who they were trying to protect with these programs. But when put to the test, when times got difficult and companies, whose main business was not delivering pension promises, began to experience financial difficulties, one of the places to find relief was the large DB pension fund. Small actuarial assumption adjustments here and there when investment times were good and you could keep from releasing cash and help the corporate bottom line. No forethought about the impact of this lack of funding when investments went the other direction. When investments did deteriorate, which was inevitable, coupled with an unfavorable interest rate market, you took slow steps to adjust those same actuarial assumptions, such that the problem was exacerbated until there is now a funding dilemma. Surprise! Surprise! But, what the heck, the government will always step in to clean up the mess. Sometimes I think the truly ethical people are those who realized the problem early, discontinued their DB plans and moved on to DC arrangements...and this from a long time proponent of the DB plan concept. How jaded I have become.
I hope the administration's proposals will do well, but I think they will just encourage financially strong employers to continue to exit, or not enter, the DB plan market. It is too expensive and risky. And those already in for the long term and in trouble, will eventually be forced to rely on the government (meaning all of us, not some nameless entity) to secure the promises made.
(f) -- hopeful, but deeply skeptical.
I am trying hard to believe, but everything dealing with DB plans that has come out of Washington for the last 20 years has been to their detriment. I am not sure that we can stand any more "help."
While well intentioned, the administration's proposal to shore up DB plans ignores the reality of the DB world. By raising liabilities, eliminating smoothing, requiring companies to disclose funding on a termination basis and increasing PBGC fees, my prediction is that more companies will get out of the game and dump their plans on the PBGC - exactly an outcome that this proposal seeks to avoid. Furthermore, the financial situation the PBGC is not as bad as they have made it seem - $17 billion of their reported $23 billion has yet to be assumed, it is on their list of "probables." (Maybe the administration wants the PBGC to assume more obligations?) About the only positive aspect of their proposal is allowing companies to increase the tax deductible contribution ceiling. Unfortunately, I think their proposal will find legs on Capitol Hill unless the DB sponsor community stands up and rallies against it. Thanks for letting me rant!
I hope a rather than b. I don't like the thought of higher premiums for many of my clients, most of whom pose little risk to the financial well-being of the PBGC. I'm afraid that a combination of the PBGC, Financial Accounting Standards Board and the IRS has all contributed to the potential demise of the retirement system.
(f) Other
Any proposal generating Wall St. unanimity can't possibly be in anyone's best interest.
There are significant problems with the system but we need to depoliticize the issue and take a hard look. One side is trying to extend "Great Society" programs and the other is still fighting the "New Deal."
B. Way too little, way too late. That sucking sound we all hear is our tax dollars going to support the likes of airline and steel workers pensions.
I haven't looked at the details, so I haven't given it much thought. My bias is that it would not be a good plan, coming from the current administration. I hope I will be surprised.
(a) About time …but I have one observation, sort of the chicken and the egg thing - if underfunded plans cannot afford to fund the plan how can they afford a risk based premium?
Why is no one addressing the retirement plans afforded members of congress?
If they were on SS, I think you would see a quick solution to the problem
(f) Another wolf in sheep's clothing. We've been through several pension simplification/reforms. Each has actually added complexity to the maze of pension funding rules. This one, unfortunately, sounds no different.
Need more details to say for sure, but funding simplification is a good idea, and corporate bonds seems a reasonable basis, though the cash-flow matching they're talking about is probably too complex.
As for the PBGC part, they're going down the wrong road. Instead of creating additional incentives for scrapping DB plans, the PBGC itself should be scrapped entirely. The "insurance" creates the wrong incentives for investments (insurance on investment return is a stupid notion), shifts risks for pension plans to people (taxpayers, who are ultimately
responsible) who don't have a pension plan themselves, allows companies to make promises they may not be able to deliver on, and gives unions incentives to negotiate for benefit improvements without regard to the company's ability to pay (imagine how their focus would change if their benefits weren't "guaranteed"). The pension trust is the insurance that benefits will get paid -- another layer, ultimately backed by taxpayers or more responsible sponsors, is counterproductive and inequitable.
Too little, too late.
Much like those who declined to take risk management measures against a Tsunami in Thailand, the proposed reforms do not correct the danger to the PBGC system because the probability of a large failure to the system is seen as too remote.
Plan sponsors already have too great an incentive to take risks on fund investments even when the risk level moves past the risk aversion boundary that fiduciaries historically thought it imprudent to cross.
What is the moral hazard on fiduciary investment risk management? Heads I win, tails other pay. If the return side of the risk/return equilibrium pays off funding costs go down, as do the proposed higher PBGC premiums for underfunded plans. But if the risk side of the equilibrium kicks in, the plan can be terminated -- perhaps with PBGC insurance protection.
The paradox is that the biggest risk to fiduciary managed pension funds is that many fiduciaries will adopt investment policies that are consistent with the more traditional fiduciary risk aversion. If they do become more risk averse they will pull back on the U.S. equity risk that they have been taking. The biggest risk to pension portfolios is then that too many fiduciaries become risk averse.
On the other hand, if fiduciaries as a whole continue to maintain a high equity profile for current and future contributions to pension funds, then the risks of large losses from these equity holdings will be less likely to show up in the short term.
Note: As a back stop to fiduciaries who don't hold the line, institutional investors now have the Social Security proposal of the Bush Administration for giving all American's a vehicle for moving some of their Social Security contributions into the stock market.
I like the overall outline as you have summarized it. I especially enjoy the phrase "Reforming the premiums" which is a very nice euphemism for "Raising the rates." I'm worried about one thing, though. As you say, "Administration officials, briefing reporters after the speech, said the administration is leaving many of the specifics up the lawmakers." While that's is clearly part of the democratic process, it makes me nervous that some lawmakers will use this bill to regulate the private DB area out of existence, by imposing requirements they know are impossible for the plans to meet. Your survey from late last year on this topic was very interesting, as many of the folks in the trenches of these plans were expressing the opinion that DB plans are essentially dinosaurs on their way out. Perhaps this is the government's opportunity to give them a big shove into the tar pit.
Sorry to miss your deadline; we West Coasties just don't get up early enough.
My answer is (f) other, i.e. laughable. There can be no "single, accurate way" to gauge a fund's liabilities. Increased disclosure just means more expense to generate more stuff nobody will read. The proposed increase in premiums further penalizes the small plans for whom the PBGC rarely, if ever, absorbs liability.
The PBGC at least needs a 2-tiered structure to make things easier for small plans with majority owners who tend to waive unfunded benefits upon plan termination. Lots of plans under 25 are already exempt for a not-very-logical reason. All the others under 25 are just helping fund the big boys who don't like to play by the rules. I say exempt all plans under 25. That makes life a lot simpler for lots of small plan sponsors and frees up PBGC personnel to go after the real money.
My answer is f) other ... why even bother reading up on it until it actually becomes law? With such a contentious house and senate, there's no way something Bush has proposed will either survive, or make it to law without any changes. I'm so tired of political hacks trying to "look good" by proposing legislation that often lacks common sense. So, I try to avoid even reading about proposed legislative changes until I absolutely have to in order to ensure our plans are in compliance.
a, b and d...since Congress must act.