Perpetual Doesn’t Mean Sustainable

KCS is a leading voice in the trying to rescue DB pension plans. We established KCS in August 2011 with the mission to try to preserve these incredibly important social and economic tools. We need to be able to manage out labor force through a natural life cycle, but the demise of the DB plan and the greater, almost exclusive use of the DC plan (private sector), is undermining this important process.

We’ve seen DB plans nearly wiped out in the private sector.  However, a significant majority of public employees (estimated at about 85%) still enjoy the benefits of a traditional plan.  But for how much longer will they?  There is a perception among public plan participants and sponsors that these plans are perpetual. However, since the Great financial crisis most, if not all, public plans have taken action to reduce the future liability by asking employees to contribute more, extend vesting periods, reduce benefits for new hires, eliminate COLAs, etc.

This doesn’t signal to us that everything is honky dory! In fact, employer contributions have rocketed higher in the last couple of decades.  There are many examples of annual contribution rates being 25% to more than 40% of salary. At what level of contribution to these “perpetual” plans become unsustainable?  For many states and municipalities, the pension contribution is but one element of a social safety net that must be funded.  As the contribution rate escalates for DB plans, it naturally squeezes out other needy programs unless there is no restriction on the taxing authority.

Given the pension envy that exists among those taxpayers in the private sector, it is doubtful that they would be supportive of any administration that attempts to substantially raise taxes in this economic environment.

DB plans can be saved, but plan sponsors and their consultants need to begin to think outside the box. Focusing on the ROA, as if it were the Holy Grail, has lead to greater volatility and little reward to show for it! DB plans need to focus on the promise that they have made, use their funded status to adjust asset allocation, and derisk plans as they see improved funding.  We missed the boat to derisk at the end of the 1990s.  Let’s not blow it again!

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s