Friday, July 31, 2009

Pension plans need to change to meet new economic realities

Pension plans cannot safely assume that they will continue forever. Although wind up is seldom imminent, there is no guaranty that it will be foreseen well in advance of the event. The pace of corporate changes is increasing, with failures and mergers that would have been unthinkable only a few years ago. Public sector plans will also be affected as accounting rule changes highlight the real costs of these plans and taxpayers question why they should fund benefits that no one else can afford.

DB pension plans are maturing. In many plans, the retired population significantly exceeds in size the active population. In these cases, the plan’s expenditures may exceed its receipts. The cost of benefits for active employees is of less relative importance than making investments that match the pension payment outflows each month. Pension security for retired and nearly retired members must be given much higher priority in these plans.

Historically, pension funds have relied on the growing wealth creation of companies to cover future benefit obligations. In many sectors wealth creation has slowed significantly and may not return to former levels. Companies need to bite the bullet and be honest about what they can afford.

The hiring freezes that are occurring in business and government are far more troubling for DB plans than excess layoffs. DB plans depend on constant ins and outs to help keep costs stable year to year. A hiring freeze cuts out the new younger employees which are needed to keep costs down. While government assistance can mitigate layoff issues, the government cannot force firms to hire. In some industries new jobs have simply dried up. Great care will be needed to avoid having an aging plan membership making the plan's current financial situation worse.

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