Forecast for Defined Benefit Pension Plans: Cloudy on the Horizon

Article excerpt

The outlook for defined benefit plans continues to be unclear as companies discontinue their traditional pension plans in order to reduce liabilities and lower costs.

Approximately 16,000 defined benefit pension plans were terminated in 1990 alone, and the number of new plans is down by more than two-thirds, according to the Internal Revenue Service. Most of the terminations involve small companies that were negatively impacted by the Tax Reform Act of 1986. However, the recent decrease in corporate profits and increased government regulations are prompting some larger companies to rethink the retirement strategy, as well. In addition, some financially strapped companies--such as Pan Am and other troubled airlines--are seeking ways to limit their obligations.

A defined benefit pension plan that uses a final-average-compensation benefit formula provides the greatest form of retirement income security for long-term employees. This plan is the only retirement plan that can provide a predictable level of retirement income and security.

On the other hand, the portability and accessibility of defined contribution plan account balances has been a major selling point for job-mobile, "live for today" baby boomers. As the baby boomers reach their 60s, however, many will experience a rude awakening as they realize that the value of their retirement dollars has not kept pace with inflation. A 34-year-old boomer who makes $35,000 a year may be enthusiastic about saving enough through a 401 (k) plan to retire at age 55 on $40,000 a year--until he or she finds out at retirement that $40,000 is only worth about $10,000 after inflation. Proponents of defined benefit plans predict that the ever-vocal boomers will push their employers to fill this potential gap between expectations and reality.

In reality, it is unlikely that defined benefit plans will experience the tremendous revival that some benefit consultants are forecasting. From a purely economic standpoint, few employers will be in a financial position to assume new pension liabilities as they struggle to compete in the international arena. Many companies have been temporarily shielded from making pension contributions during recent years because the level of assets in their plans could not, by law, exceed 150 percent of current liabilities. Now, as these companies return to a situation where they, too, are required to resume contributions, they are faced with other competitive pressures inhibiting their ability to make contributions.

Increased government regulation over the past decade also has complicated defined benefit sponsorship. …