The Preservation of the Insured Defined Benefit Pension Program

Article excerpt

ABSTRACT

Over the past twenty-five years, a downward trend in the number of insured defined benefit pension plans has surfaced despite efforts by governing bodies such as the U.S. Congress, the Pension Benefit Guaranty Corporation, and the Financial Accounting Standards Board to make changes to pension laws, regulations, and accounting standards. This paper presents a discussion of the benefits and negative implications of preserving this program from three different perspectives: (1) from a national fiscal policy viewpoint; (2) from the position of an employer providing such benefits; and (3) from the standpoint of the plan participant. Data is provided to support the discussions. The advantages for national fiscal policy and plan participants are several with few drawbacks. The impact on the employer is more complex and accordingly, a model is developed to depict the directional relationship between identified variables and the employer's choice to initiate and maintain a defined benefit plan. Several variables are hypothesized to have a negative effect on this choice. Reforms are recommended to encourage employers to continue as willing partners in this program including simplification of the relevant accounting and funding rules, incentives to eliminate unfunded pension obligations, emphasis of hybrid alternatives to traditional defined benefit plans, and implementation of risk-driven insurance premiums. The model is revised based on these recommendations.

INTRODUCTION

The United States (U.S.) private sector has provided pension plans for employees for more than a century. Their popularity grew after World War II motivated by wage and price controls, high corporate income taxes, and the 1948 decision of the National Labor Relations Board (NLRB) "that pensions were a mandatory subject for collective bargaining" (Coleman, 1985, p. xiv). Employee pensions, especially union plans, were usually offered as defined benefit (DB) plans where participants relied on plan sponsors to fulfill their promise of benefits (Seburn, 1991). The failure of Studebaker-Packard to honor its commitment of retirement benefits to participants triggered public outcry that ultimately led to the 1974 Employee Retirement Income Security Act (ERISA) (Brown, 2008). An integral part of ERISA was the creation of the federal corporation, the Pension Benefit Guaranty Corporation (PBGC), to protect millions of Americans from potential catastrophic loss of their promised retirement benefits as an insurer of DB pension plans. Questions exist regarding the longevity of the DB pension system and the future ability of the PBGC to protect participants of these plans.

A private retirement plan is a discretionary employee benefit offered by an employer. Unlike Social Security where participation is mandated by the federal government, employers are not compelled to initiate or continue their pension plans. DB plans may be sponsored by specific corporate entities as single-employer plans or they can be established by more than one employer with collective bargaining units as multiemployer plans. This paper's discussion is limited to single-employer plans as they represent 27,647 of 29,142 plans or about 95 percent of the total number of plans insured by the PBGC and 33.6 of the 44 million or 76 percent of insured-plan participants (PBGC, 2009c). A defined contribution (DC) plan represents an alternative to a DB plan.

The U.S. Government Accountability Office (formerly the U.S. General Accounting Office (GAO)) placed the single-employer DB pension insurance program on its "high-risk list" in 2003 when its deficit was $11 billion (PBGC, 2003a) because it was financially weak and faced "serious, long-term risks to the program's future viability" (GAO, 2003, p. 3). No substantial improvements in the financial health of this program have occurred since this time; in fact, one could argue that the condition has actually weakened with its current deficit of $23 billion (PBGC, 2010a). …