(Corrects year to 2004 in paragraph 7.)
By Mark Miller
CHICAGO, April 1 This should be good news: At a
time when worry about the retirement security of American
workers is rising, traditional pension plans finished 2013 in
their best shape last year since the financial crisis of 2008.
Yet that may only be setting the table for more corporations to
stop offering them.
The funding deficit of the 100 largest pension plans
sponsored by publicly traded U.S. corporations plunged 57
percent in 2013, to $125.9 billion in the year-ago period,
according to Towers Watson, the benefits consulting firm.
(Funding is a measure of the assets that plans have on hand to
pay projected obligations to beneficiaries.)
The improvement resulted from solid investment returns and
higher interest rates. A Mercer analysis of pension funds
sponsored by S&P 1500 companies showed similar gains.
"It was a very good year," said Alan Glickstein, a senior
retirement consultant at Towers Watson. "Interest rates were up,
liabilities were down and equities were up. We saw the biggest
jump in funded status in a long time."
But that may just spur a new round of corporate pension
"de-risking" - industry jargon for decisions by plan sponsors to
terminate or freeze plans, or transfer the obligations to
insurance companies, which replace pensions with commercial
annuities. De-risking becomes less costly as plan health
"It's all I hear from chief financial officers - 'How do we
get rid of pensions?' " says Karen Friedman, executive vice
president and policy director of the Pension Rights Center, a
non-profit advocacy group.
The slide in defined-benefit coverage is nothing new in the
corporate sector. Although most public-sector workers still have
traditional pensions, just 35 percent of Fortune 1000
corporations had active plans in 2011, down from 59 percent in
2004, according to Towers Watson.
That's bad news for most working households; defined-benefit
pensions protect their retirement security better than
defined-contribution plans. Only high-income households have
sizable 401(k) nest eggs, and 45 percent of working-age
households own no retirement account assets, according to the
National Institute on Retirement Security.
"The focus on employer decisions to abandon traditional
pensions misses the larger retirement income crisis," says Josh
Gotbaum, director of the Pension Benefit Guarantee Corp. (PBGC),
the federally sponsored agency that takes over and continues
paying benefits when plans go belly-up.
The most worrisome trend is de-risking moves involving
retirees, who live on fixed incomes. In 2012, General Motors Co.
and Ford Motor Co. announced moves to terminate
large portions of their defined-benefit pension programs. Ford
offered 90,000 retirees the option to keep their pensions or
take a lump sum buyout; GM made a similar offer to 118,000
retirees, but also gave them the option to continue getting
pension payments through a group annuity contract arranged with
insurance giant Prudential.
A lump sum can be tempting, but it usually isn't in a
retiree's interest, largely because of the loss of guaranteed
lifetime income. Lump sums have also become less favorable to
workers because of reforms in the Pension Protection Act of 2006
that changed interest rate formulas in a way that reduces their
value by roughly 10 percent.
"Plan sponsors are going to folks who are least skilled in
investing and have the most to lose, and saying, 'Here's a pot
of money - so what if you are taking it at a 10 or 15 percent
discount?" Gotbaum says. "Unfortunately, a lot of people are
Annuity transfers may keep workers and retirees whole on
payments, but there's no backup protection from the PBGC. For
commercial annuities, state-level guarantee associations may
step in to pay a portion of benefits in the event an insurer
fails. But the benefit guarantees vary from state to state.
Despite improved plan health, Glickstein says sponsors still
want to get pensions off their balance sheets to cut costs.
One factor is the rising cost of premiums sponsors pay to
the PBGC. In December, Congress agreed to gradually raise
premiums over two years. Plan sponsors will pay a flat
per-employee annual premium of $64 in 2016, up from $49 this
year; sponsors also pay an additional variable rate on any
unfunded liabilities in their plans. According to Gotbaum, the
average combined per-person premium will be $90 within the next
The premium hike aims to address PBGC's chronic
underfunding, which results from a mismatch between premiums -
which it doesn't control independent of Congress - and the risks
the agency manages. The agency reported a record deficit in
fiscal 2013 of $35 billion.
Gotbaum acknowledges that the increases have been dramatic,
but he doesn't believe premiums cause plan sponsors to drop
plans. "Most of the arguments are false, but that doesn't mean
we want premiums to be raised unnecessarily, because we don't
want to burden people who offer good retirement plans - we want
to encourage them."
Rising longevity also is pushing costs higher. The actuarial
tables used to measure pension obligations will be updated this
year, boosting average life spans by about four years each for
men (to an average of 86.6 years) and women (to 88.8 years).
That will require plan sponsors to boost contributions to
match the expected obligations, raising long-term costs by about
7 percent for typical plans, according to Aon Hewitt, the
benefits consulting firm. The new tables also will make lump sum
offers more expensive; some benefit consulting firms are urging
plan sponsors considering lump sum offers to move now or in
2014, before the new longevity numbers take effect.
Friedman hopes for a different outcome.
"Now that pension plans are once again becoming almost fully
funded, we'd like to see companies start to think about ways of
keeping these plans instead of finding ways of dumping them."
For more from Mark Miller, see link.reuters.com/qyk97s
(Follow us @ReutersMoney or here.
Editing by Douglas Royalty)