Ryan ALM is a leading voice in the trying to rescue and preserve DB pension plans. We were established in June 2004 with the mission to try to preserve these incredibly important social and economic tools by focusing greater attention to the promise that was given to the plan’s employees. We believe that everyone should be entitled to a dignified retirement, but the demise of the DB plan and the greater, almost exclusive use of the DC plan (within the private sector), is undermining this important effort.
Regrettably, 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 pension plan. But for how much longer will they? As I mentioned at the Opal/LATEC conference in New Orleans just yesterday, 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 do 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 necessary programs unless there is no restriction on the taxing authority’s ability to raise revenue.
Given the pension envy that exists among those taxpayers in the private sector that aren’t participants in a DB plan (most), it is doubtful that they would be supportive of any administration that attempts to substantially raise taxes in this economic environment to fund someone else’s retirement benefit.
DB plans can be saved, but plan sponsors and their consultants need to begin to think outside the box. Focusing on the return on asset assumption (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 de-risk plans as they see improved funding. We missed the boat to de-risk at the end of the 1990s. Let’s not blow it again!