Union Pensions at Risk
The Pension Benefit Guaranty Corporation PBGC , an independent federal agency funded by contributions from pension funds, took over responsibility for the payments given to 4, members. It slashed benefits by more than 60 percent. The PBGC, however, is on equally shaky ground as more and more private sector and union retirement funds file for relief.
20,000 Union Members, Retirees at Risk of Losing Pension Benefits
To avoid draining the PBGC, the federal government adopted legislation in that allow multi-employer pension plans to cut benefits, which were previously treated as earned compensation that could not be taken away. Those cuts could only be implemented with approval from the Treasury Department.
Numerous labor organizations have applied for relief although most applications are rejected or withdrawn.
In January, the Treasury Department approved drastic cuts to the Ironworkers Local 17 pension fund that devastated retirees. Only those who retired for disability reasons or those over 80 were spared cuts. Dan Wargo began working as an ironworker in and retired 10 years ago. While this type of plan is popular among unionized workers, Final Average Pay FAP remains the most common type of defined benefit plan offered in the United States.
In FAP plans, the average salary over the final years of an employee's career determines the benefit amount. Averaging salary over a number of years means that the calculation is averaging different dollars. For example, if salary is averaged over five years, and retirement is in , then salary in dollars is averaged with salary in dollars, etc. The pension is then paid in first year of retirement dollars, in this example dollars, with the lowest value of any dollars in the calculation.
- Gallows Bird in Heaven.
- 20, Union Members, Retirees at Risk of Losing Pension Benefits – Advancing Smartly?
- The Connecticut State Constitution (Oxford Commentaries on the State Constitutions of the United States);
Thus inflation in the salary averaging years has a considerable impact on purchasing power and cost, both being reduced equally by inflation. This effect of inflation can be eliminated by converting salaries in the averaging years to first year of retirement dollars, and then averaging. In the US, 26 U. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan.
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This method is advantageous for the employee since it stabilizes the purchasing power of pensions to some extent. If the pension plan allows for early retirement, payments are often reduced to recognize that the retirees will receive the payouts for longer periods of time. In the United States, under the Employee Retirement Income Security Act of , any reduction factor less than or equal to the actuarial early retirement reduction factor is acceptable.
Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age usually age Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional temporary or supplemental benefits , which are payable to a certain age, usually before attaining normal retirement age. In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid.
Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes.
This method of financing is known as pay-as-you-go. Social Security system is partially funded by investment in special U. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. All plans must be funded in some way, even if they are pay-as-you-go, so this type of plan is more accurately known as pre-funded.
The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary to ensure that the pension fund will meet future payment obligations. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. Traditional defined benefit plan designs because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: Defined benefit pensions tend to be less portable than defined contribution plans, even if the plan allows a lump sum cash benefit at termination.
Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income.
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The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement.
The age bias, reduced portability and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector which has open-ended support from taxpayers. This coupled with a lack of foresight on the employers part means a large proportion of the workforce are kept in the dark over future investment schemes.
Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees mainly because the employer tends to pay higher contributions than under defined contribution plans , so such criticism is rarely harsh.
The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions.
These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.
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So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional. This has serious cost considerations and risks for the employer offering a pension plan. One of the growing concerns with defined benefit plans is that the level of future obligations will outpace the value of assets held by the plan.
This "underfunding" dilemma can be faced by any type of defined benefit plan, private or public, but it is most acute in governmental and other public plans where political pressures and less rigorous accounting standards can result in excessive commitments to employees and retirees, but inadequate contributions. Many states and municipalities across the United States of America and Canada now face chronic pension crises. Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other taxes.
In the United States, the Social Security system is similar in function to a defined benefit pension arrangement, albeit one that is constructed differently from a pension offered by a private employer; however, Social Security is distinct in that there is no legally guaranteed level of benefits derived from the amount paid into the program. Individuals that have worked in the UK and have paid certain levels of national insurance deductions can expect an income from the state pension scheme after their normal retirement. The state pension is currently divided into two parts: Individuals will qualify for the basic state pension if they have completed sufficient years contribution to their national insurance record.
The S2P pension scheme is earnings related and depends on earnings in each year as to how much an individual can expect to receive. It is possible for an individual to forgo the S2P payment from the state, in lieu of a payment made to an appropriate pension scheme of their choice, during their working life. For more details see UK pension provision. In a defined contribution plan, contributions are paid into an individual account for each member.
The contributions are invested, for example in the stock market, and the returns on the investment which may be positive or negative are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries.
For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan. Money contributed can either be from employee salary deferral or from employer contributions.
The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans you do not need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans in practice, defined contribution plans have become generally portable. In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.
The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown until calculated. Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.
A defined contribution plan typically involves a number of service providers, including in many cases:. In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account see 26 U. Examples of defined contribution plans in the United States include individual retirement accounts IRAs and k plans.
In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages , and some provide for a portion of the employee's contributions to be matched by the employer.
In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age—typically the year the employee reaches In the US, defined contribution plans are subject to IRS limits on how much can be contributed, known as the section limit. The committee is comprised of 16 members of Congress, eight from each party, from both the House and Senate members. The group held its first meeting on March Brown said he needs at least a majority to get the multiemployer issue solved. Unlike most issues in Washington, Brown said this has bipartisan support. The multiemployer pension plans of 1.
Multiemployer plans are at risk because there are about four retirees pulling benefits for every active worker. There are only about 80, unionized workers, mostly Teamsters, in the heavy freight sector of the trucking industry. Their dues are supporting perhaps as many as , unionized retirees, many in trucking industry. UPS Teamsters, which number about ,, are in separate pension plans. The Teamsters Central States pension plan is the largest multiemployer plan in the nation.
The Central States plan is forecast to become bankrupt sometime in the next decade. Central States receives contributions from just 54, active workers to pay out benefits to , retirees—a ratio of 1 active to 4 retirees vs. The Pension Benefit Guaranty Corp.