Comments on: Defined-Benefit Pensions Should be Outlawed

By: MichaellaS

MichaellaS — Tue, 21 Jul 2009 09:33:17 +0000

tks for the effort you put in here I appreciate it!

By: Evie

Evie — Mon, 15 Jun 2009 15:35:37 +0000

What Can we common Poeple do about the Bailout? Nothing.. we just have to wait and see if the company comes up and develops new cars and prototypes to please the americal consumer

By: KattyBlackyard

KattyBlackyard — Mon, 15 Jun 2009 01:02:22 +0000

Hi, gr8 post thanks for posting. Information is useful!

By: Christian

Christian — Sat, 18 Apr 2009 11:20:29 +0000

In the UK 90% of defined benefit pension schemes are in deficit. The total deficit is over £250bn and we have a tiny pension protection fund to cover that of just a few £bn. If some big schemes go bust then either the government will have to bail them out, which it can ill afford to do, or people will lose their pensions.

There certainly need to be tighter rules in place over what sort of investment strategy is appropriate for pension funds - we tend to invest in riskier assets to make up for the fact that we don’t invest enough. We need to focus on investment that matches the liabilities instead. But we also need to recognise that defined benefit pensions are like blank cheques. We have no idea how long people will be living in 10 years time. Actuarial predictions are just guesses. Even being out by a few years adds huge costs to your scheme and there is simply no way to calculate this in advance. So how much do you invest?

One thing is certain, we need to contribute much more and work for longer. In 2012 the UK is introducing a new system where every employee is automatically enrolled in a new type of pension called a Personal Account. The employer must contribute a minimum amount into this pension for them although this is currently only 3%. In Australia they already put in much more.

We all need to take personal responsibility and invest as much as we can but in the knowledge that there will be a safety net for those who cannot afford to do this.

By: William Bologna

William Bologna — Thu, 16 Apr 2009 23:42:11 +0000

@ Gary

Your point is well taken, well managed and funded State plans will not be adversely effected in the long run by cyclical downturns and clearly do not need to be 100% funded in a downturn. But, how many States and municipalities are 100% funded in boom times? if a plan is not 100% funded in good times, municipal plans can actually become insolvent in bad times. For example, remember, it was not long ago that New York City nearly went bankrupt. Given the potential loss in revenue from its primary base “Wall Street” it could find itself in a similar position within the next year or two and not be able to meet its pension obligations.

Clearly, corporate underfunding is a more serious problem - bankruptcy judges have not been kind to retirees - they are just another class of creditors.

By: Gary Fredricks

Gary Fredricks — Thu, 16 Apr 2009 23:13:11 +0000

A plan’s funding status is actuarially determined. It depends on the investments balance, projected earnings from the investments; projected contributions from employers and employes and projected benefits to be paid. A year ago my state’s PERS (public pension system) was fully funded but is now $15 billion in the hole as a result of 2008’s terrible results in the stock market. Your requirement that my state immediately provide $15 billion to its PERS is totally unrealistic. It has many years to adjust, hopefully the market will recover making increasing the employer/employee contribution rates unnecessary.

By: William Bologna

William Bologna — Thu, 16 Apr 2009 18:45:07 +0000

@ Sue,
Reality check - GM has over $20 billion and Chrysler has $9.3 billion underfunded liabilities to their pension plans - the PBGC can only legally pick up $4.0 billion of the GM and $2.2 billion of the Chrysler shortfall. In bankruptcy GM employees will lose $16 billion and Chrysler employees $7.1 billion. Ask all those airline employees how well they did in bankruptcy court!

Maybe your firm is better than most but the average defined benefit plan in the U.S. is only 60% funded.

At a minimum all plans should be 100% funded.

By: Sue

Sue — Thu, 16 Apr 2009 15:57:03 +0000

Obviously the person who wrote this article does not know much about pension plans. I work for a TPA firm, which is a third party administrator of qualified retirement plans. I work on defined benefit plans and defined contribution plans for a living. Basically all of the problems you highlight above are no longer existant concerns after PPA 2006 was passed. Ever hear of an AFTAP, segment rates, new funding capabilities like 150% funding, have you studied the new regulation put forth to restict actuarial assumptions. If you studied everything under PPA 2006 you would know all the concerns like use of high interest rate assumption for asset growth are no longer allowed. In fact the assumptions now have to be set under the traditional industry rule of thumb that properly managed assets will earn about 6% in the market. You would also know if you studied defined benefit plan in general that there are several types of defined benefit plan such as the 412e plan. The IRS requires the 412e plan funds are invested in garunteed contract that are comparable to a basic CD at a bank. Should we get rid of CD’s as well? They promise a certain amount of money at the end of a term, but your bank has to stay afloat for you to get paid. To all of you “tax payers” out there who claim you’ll have to bail out these plans…obviously your just as uneducated as this author. You don’t pay into the PBGC and that’s who has to take over these plans. Ever here of PBGC premiums, probably not cause you don’t pay them and companies do. If you don’t pay premiums you are not eligable for the PBGC to take over your plan if your company fails. Do you know the requirements to be eligable to have your plan covered by the PBGC, probably not. Have you ever heard of a destress termination…probably not. Do you know what happens to the benefits of the owners, highly compensated individuals, when a plan fails…no you don’t. I suggest to all of you if you do not work on these plans for a living as I have for the last 8 years don’t offer your oinion as an uneducated individual.

By: Kim

Kim — Tue, 14 Apr 2009 16:13:00 +0000

To summarize, it appears that your problem is not with DB plans, per se, but with unfunded or underfunded plans. That is a totally different issue. The solution, as you have hinted, lies in fixing the funding requirements. A properly funded trust is not impacted by the bankruptcy of the employer.

By: William Bologna

William Bologna — Tue, 14 Apr 2009 14:53:33 +0000

@Richard,
I clearly agree that reform is long overdue and our pension system is among the worst is the industrialized world. The first reform that is needed: All pensions defined benefit or defined contribution including state and city must be funded in the quarter in which the obligation is incurred. There is certainly no guarantee that Microsoft or Apple or any other iconic American company will be here to meet its obligations 30 years from now. This deals with the ubiquitous problem of over promising and under funding.

As far as public pensions are concerned there is a demographic time bomb that cannot be ignored. Just like Social Security which started with 16 workers for each retiree and has degenerated to 2 workers per retiree; all unfunded pensions will ultimately face the same problem. Many municipal Pension plans have more in common with Ponzi schemes than with retirement programs. There will never be enough children and grandchildren to pay.

I am not suggesting that individuals mange their accounts, only that they have a choice of regulated and registered investment firms with a limited choice of professional investment options.