(The opinions expressed here are those of the author, a columnist for Reuters.)
By Mark Miller
CHICAGO, April 1 (Reuters) - 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 improves.
“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 2011, 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 taking it.”
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 two years.
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.”