Academic journal article Academy of Accounting and Financial Studies Journal

The Preservation of the Insured Defined Benefit Pension Program

Academic journal article Academy of Accounting and Financial Studies Journal

The Preservation of the Insured Defined Benefit Pension Program

Article excerpt


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 (Sebum, 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, 2003 a) 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). Plans that are fully funded contribute premium revenue with no commensurate current risk to the PBGC. A sponsor of a fully-funded plan may execute a standard termination and settle their pension obligations typically by purchasing annuity contracts for their participants. When a fully-funded plan is terminated, it is removed from the PBGC insurance pool and as a result, the quality of the pool declines.

Many reasons have been posited for the movement away from DB plans (U.S. Department of Labor, 1997). Despite efforts by the U.S. Congress through legislation to enhance funding of DB plans and the Financial Accounting Standards Board (FASB) to enable transparency between a plan and its sponsor, the downward trend in the number of plans shows no signs of abating. In the following pages of this paper, the benefits and negative implications of the continuation of this program are discussed in the context of three different perspectives: (1) from a national fiscal policy viewpoint; (2) from the position of an employer providing such employee benefits; and (3) from the standpoint of a plan participant. This discussion leads to the development of an employer model where the relevant variables and their directional impact on the employer's choice to offer a DB plan are described. Data on the recent trends of the program are provided. Several recommendations for reform are presented and the model is revised accordingly. …

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