Wednesday, October 12, 2011

Private Sector Defined Benefit Plans in the News

Given the rhetoric of the anti-defined benefit crowd, it may be shocking to some that defined benefit plans still exist in the private sector. 

We’re here to tell you “They do.”  

Today’s Wall Street Journal carries a brief story about the impacts of declining global markets on public and private sector defined benefit pension systems. The story, “Tin-Hat Time for Pension Funds,” says this:

Stocks are getting pummeled as the prospect of a global slowdown increases. The S&P 500 is now down more than 10% year-to-date. Meanwhile, already superlow [sic] bond yields are getting even lower, thanks to the Federal Reserve's latest extraordinary easing action. The 30-year U.S. Treasury bond at one point on Thursday yielded less than 2.8%.

That is the kind of one-two punch that will worsen pension deficits while also making the contributions required to fill holes even bigger…How this dire situation plays out will differ somewhat for private and public pension funds. Private-company funds will more quickly feel the market's pain. That is in part because the way they calculate pension deficits is more closely tied to moves in interest rates than is the case for public pension funds.

The story goes on to mention a Credit Suisse analyst’s note about the funded status of pension plans at Goodyear Tire & rubber, AK Steel, Supervalu, Lockheed Martin, and Northrop Grumman. This is yet more proof, for those who don’t normally keep up with pension issues, that defined benefit plans do still exist in the private sector, and much more commonly than known. (We proved this in Texas earlier this year in an op-ed published by the Houston Chronicle. Take a look too at our blog on the issue.)

A few more points need to be drawn out about the WSJ piece:

If defined benefit plans were so totally ineffective in attracting and retaining employees, then would private sector companies still have them? 

If defined benefit plans were so detrimental to private sector company finances, then wouldn’t we hear more about contention at shareholder meetings over retirement plans? 

To answer those rhetorical questions, we don’t see private sector companies entirely dropping their DB plans. We don’t see shareholder meetings zeroing in on defined benefit plans in media coverage of financial industry matters.

Our point here is simply that the contentions that defined benefit plans don’t exist in the private sector anymore – and the corollary that public sector employers need to ditch theirs too in favor of defined contribution/401(k) plans – are false. – Max Patterson

Thursday, October 6, 2011

Texas Public Employees Association Notifies Members of Attempts to End Defined Benefit Plans

We took note of a recent communication from The Texas Public Employees Association, the oldest and largest state employee group, to their members about a story in the Austin-American Statesmen. As a non-partisan, non-union association, TPEA is the leading advocate for ALL state employees and retirees before the Texas Legislature and their communication serves to correctly frame a situation now facing all statewide public employee pension plans. Please note their call-out about the policies that two of the largest pension systems adhere to in order to maintain cost feasibility to taxpayers. – Max Patterson


Troubling Proposal To End Traditional Public Employee Retirement Plans Floated

A recent Austin American-Statesman article discusses a group in Houston that wants to amend the Texas Constitution to prevent new public employees from participating in defined benefit retirement plans, such as those under ERS and TRS, even though these state plans are in good fiscal shape. 

Although this group appears to be motivated by problems with local retirement plans in Houston, their proposal would have dire consequences for retirees and employees in all public pension plans in Texas.

TPEA believes the efforts by this group and others pose a potentially serious threat to maintaining our retirement plan. All state employees and retirees and their families should be sure to communicate with legislators their support for our current retirement plan. State employees and retirees have worked hard for this benefit and it provides modest but stable benefits that are essential for our retirement security.

While a number of states and some localities nationally have troubled retirement plans, Texas and our state leaders, by contrast, stand as a national model on how to establish and prudently manage sustainable retirement plans.

Two state-run retirement plans, ERS and TRS, include features that keep costs low, prevent abuses found in other states, and promote long-term sustainability. These features include:
·         Shared responsibility for contributions between the state and employees.
·         No pension “spiking”.
·         No contribution holidays.
·         No collective bargaining by ERS or TRS participants.
·         No automatic cost of living adjustments (COLAs).
·         Strong statutory and legislative requirements to ensure accurate actuarial impact analysis of proposed changes.

State leaders have actively managed both ERS and TRS to help ensure long-term sustainability of the plans. Legislative leaders enacted significant changes to TRS in 2005 and to ERS in 2009. These changes prefigured reform plans many other states and other plans are now attempting to put in place.

TPEA researched some of the claims made about defined benefit retirement plans during consideration of HB 2506 during the past legislative session and found that most are not supported by the facts. For instance, claims have been made that the decline in participation in defined benefit plans by private employers has taken place because such plans are inherently too expensive. In fact, changes in federal laws and regulations played the major role in the decline of private sector DB plans. This NIRS study found “the public sector has not been subject to the regulations that so drastically changed funding and accounting rules in the private sector.”

Analyses of defined contribution retirement plans such as 401(k) plans also show that they are a poor choice as a primary retirement savings vehicle because many eligible plan participants fail to contribute sufficiently, invest less than optimally, and frequently withdraw contributions prematurely. An analysis comparing DB and DC plans also found that traditional defined benefit plans are much more cost-effective. “The cost to deliver the same retirement income to a group of employees is 46% lower in the DB plan than in the DC plan.”

Since state employee salaries are 15 to 20 percent below pay for comparable private sector jobs, the promise of a stable and predictable retirement income is a key motivator in maintaining an affordable and competent workforce for Texas taxpayers. While these issues will continue to be studied and debated, it is essential that decision makers look at the facts here in Texas and not rely on faulty comparisons based on problems in other states.