predicting the end of DB pension plans...

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Valuethinker
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predicting the end of DB pension plans...

Post by Valuethinker »

http://www.nytimes.com/2009/04/24/busin ... ns.html?em
Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.
The hard thing is that the retired autoworkers and car company white collar employees have done nothing wrong. Long service to the company was rewarded with a good pension-- part of the reason to be in that industry.

But they failed to forecast the deterioration of the US domestic car manufacturer.

If recent events teach us anything, it is the problem of systemic risk. One part of the system (Lehman Brothers) fails, and the repercussions ripple across the whole financial system.

The systemic effect could well be the end of DB pensions, except for certain executive schemes which are part and parcel of hiring C-Xlevel executives and senior managers.

Ironically, as an after-effect of the 2000-02 stock market crash, GM's pension fund is apparently highly weighted in bonds, and so has performed relatively well.

But if the plan sponsor goes, that is not enough to protect you. The actuarial assumption is ongoing contributions to offset accumulated liabilities.
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Post by Harold »

This is really a very open question. A countervailing force is that the 401(k) regime has left an entire generation very underprepared for retirement.

That's likely to lead to demand for benefits (from the employer, the government, whoever) and to a desire for employment past normal retirement, which limits the options for employers who no longer have the ability for orderly retirement of unproductive workers that DB plans allow.

Whether that means any kind of resurgence of DB-type arrangements is quite uncertain. But it's far from clear that this is a death knell (and that bell's been clanged many times before).
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Post by Valuethinker »

Harold wrote:This is really a very open question. A countervailing force is that the 401(k) regime has left an entire generation very underprepared for retirement.

That's likely to lead to demand for benefits (from the employer, the government, whoever) and to a desire for employment past normal retirement, which limits the options for employers who no longer have the ability for orderly retirement of unproductive workers that DB plans allow.

Whether that means any kind of resurgence of DB-type arrangements is quite uncertain. But it's far from clear that this is a death knell (and that bell's been clanged many times before).
THe problem is the liability falling on the plan sponsor.

Accordingly, something like the Dutch 'average salary' schemes will emerge.

Each year, a fixed percentage of your salary will go to buy a benefit package *based on that year* (so benefits will be based on average earnings, rather than final salary). Some forms of structure such as derivatives may be used to guarantee the value of that contribution. (Switzerland is more or less like this).

This will transfer the risk of underperformance from the sponsor to you.

It is that risk of underperformance that the employers can no longer bear.

On 401ks smart employers will look at Vanguard-izing them, but with a restricted range of funds (say an equity fund, a bond fund, and a balanced fund as default).
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Post by heyyou »

VT, smart employers could do that now, and they don't. My former employer chose the 401k vendor who promised the least expense to the company, not the least expense to the workers. Approaching retirement, I was paying the provider over $2000 each year in admin fees.

Note that all businesses eventually fail, it is just a question of longevity.
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Post by Harold »

Valuethinker wrote:
Harold wrote:This is really a very open question. A countervailing force is that the 401(k) regime has left an entire generation very underprepared for retirement.

That's likely to lead to demand for benefits (from the employer, the government, whoever) and to a desire for employment past normal retirement, which limits the options for employers who no longer have the ability for orderly retirement of unproductive workers that DB plans allow.

Whether that means any kind of resurgence of DB-type arrangements is quite uncertain. But it's far from clear that this is a death knell (and that bell's been clanged many times before).
THe problem is the liability falling on the plan sponsor.

Accordingly, something like the Dutch 'average salary' schemes will emerge.

Each year, a fixed percentage of your salary will go to buy a benefit package *based on that year* (so benefits will be based on average earnings, rather than final salary). Some forms of structure such as derivatives may be used to guarantee the value of that contribution. (Switzerland is more or less like this).

This will transfer the risk of underperformance from the sponsor to you.

It is that risk of underperformance that the employers can no longer bear.

On 401ks smart employers will look at Vanguard-izing them, but with a restricted range of funds (say an equity fund, a bond fund, and a balanced fund as default).
You've outlined one scenario, but that's far from the only one.

By the way, what you're calling the "risk of underperformance" might otherwise be characterized as organizations promising benefits that they weren't willing to fully pay for, rather taking on greater risk to do so.

It'll be interesting to see where this goes. But given the needs of both employees and employers, I'm not so sure the system's going to fully go away without something somewhat addressing those needs replacing it.
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Post by Valuethinker »

Harold wrote:
You've outlined one scenario, but that's far from the only one.

By the way, what you're calling the "risk of underperformance" might otherwise be characterized as organizations promising benefits that they weren't willing to fully pay for, rather taking on greater risk to do so.
What I mean is from the CFO/ Board perspective, that a pension fund is a financial liability which cannot be controlled by corporate action (being dependent upon the vaguaries of asset performance).

That will be transferred to the individual, but by using a form of 'average salary' scheme, the risk may be controllable. This is more or less what the Dutch have done (benefits linked to average salary) and the Swiss (fund takes a deliberately conservative investment policy to guarantee investor gets his/her money back).

The risk of underperformance is perhaps more correctly stated as 'the risk that fund performance + contributions won't meet contractual liabilities'.

From the plan member point of view, the risk of sponsor insolvency is not something that has been thought about, enough-- the PBGC won't be enough.
It'll be interesting to see where this goes. But given the needs of both employees and employers, I'm not so sure the system's going to fully go away without something somewhat addressing those needs replacing it.
I think though that the institutional dynamic, about an unfunded liability, will be critical. At least in the private sector.

The rational thing to do as a private sector actor (think: airlines, steel, and now autos) is to go bust, and dump the liability on the PBGC.
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Post by Harold »

The organization could have made, and still could make, large contributions thereby reducing the need to take risk (and reduce reliance upon the vaguaries of asset performance).

But you're right that given the current situation, dumping the liability on the PBGC is a likely scenario.
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Post by RobertH »

DB plans with unfunded liabilities force CEOs to choose between stakeholders with different interests: shareholders and current/future pensioners. In the US, regulations define necessary (if not sufficient) funding for a DB plan. In times of financial stress this decade, the US government has relaxed the funding requirements for pension plans. One might argue that this serves the long-term interests of the 'average' pensioner, but this is little comfort for a pensioner whose company goes bankrupt - the PBGC safety net is not seamless. Case in point: two members of my family had their pensions reduced by PBGC: one of them had to go back to work.
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Post by metabasalt »

As an employee of a company currently in Chapter 11 proceedings and with a Multiemployer pension plan, fully funded until last year, I wonder if anyone has any advice on whether it makes sense to leave work and take the pension while it is still available.

I know that there are all sorts of variables involved. Without going into a great deal of detail I can say that I may be laid off at any time and that I can walk out the door and get my severance today. My fear is that my company could be like the auto companies in 5 years or so. I'd lose medical benefits if I left now but at least I'd be able to collect the pension (minus a small penalty for taking it early). My reading of PBGC for Multiemployer plans is that the benefits are extremely slim. So I really have a great fear of what I might get if the pension were dumped on PBGC, especially after the auto unions.
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Post by Valuethinker »

Harold wrote:The organization could have made, and still could make, large contributions thereby reducing the need to take risk (and reduce reliance upon the vaguaries of asset performance).

But you're right that given the current situation, dumping the liability on the PBGC is a likely scenario.
Unless we take the Continental approach and put nearly 100% into government bonds, there isn't an easy way around this. And doing this would require very high levels of overfunding.

And that means no, or nearly no, inflation or longevity protection.

Another alternative, perhaps, is that we annuitize all the remaining pension scheme members. Which is what is normally done in a wind up scenario for a DB plan.

Or each annual contribution could be placed into a deferred annuity at the end of year.

However that is simply transferring the risk to the credit risk of the insurance company.
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Post by Mitchell777 »

I think it's a good bet that DB plans dissappear in the private sector. Small companies could not afford them even if they wanted them and the continuation of any small company is often in question. It's much cheaper even for a large employer to toss 3% each yr into a 401K rather than have a DB plan. I work for a company with tens of thousands of employees. Only one person has a DB plan. I'll leave it to your imagination to figure who (no it's not me). Tough part is that while people in the private sector must put aside more of their own money for retirement, they will also need to pay increased taxes to
make government DB pensions whole. It may be a real struggle in some areas of the country. My city, state, and county politicians have already thrown out the hint that tax increases are coming due to losses in pension plans
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Post by Harold »

Valuethinker wrote:Unless we take the Continental approach and put nearly 100% into government bonds, there isn't an easy way around this. And doing this would require very high levels of overfunding.
There's a big difference between say 70% stock, real estate, and other such investments, and being 100% bond. If plans are trying to hedge their risks, that's one thing. But clearly, many plans invested aggressively because they didn't feel a need to fund safely. Quite disingenous to then blame "the market".
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Post by nisiprius »

Promises, promises...

For some time now, the powers that be have been advancing the notion that workers should treat jobs as disposable and companies should treat workers as disposable. Leaving aside the slight asymmetry in the proposition, there is a terrible destruction of human capital in the notion that people should switch jobs every few years, rather than holding them for life.

How can you have "continuous improvement" and "empowered employees" and "high-powered work teams" and all the management-guru-recommended practices, if there's nobody in the company, at the level where the work is really done, who holds long-term institutional knowledge in his head? Managers kid themselves about this, but 90% of a company's institutional knowledge is in heads, not on paper. And not managers' heads, either.

But, how can have long-term employees if you've been training them for decades to distrust any long-term promises?

I worked at a non-profit research institution. When I joined, they made a big deal about the tuition benefit--they'd pay part of your kid's tuition when he entered college. My kids were toddlers at the time. Well, about fifteen years later, just before my kids hit college age, they decided to cancel that--or, more correctly, continue it only for the research scientists at the institution, which I wasn't. (It had previously been available to everyone). I asked whether it was a grandfathered benefit for those who'd been promised it when they joined. Nope.

Why did I shrug it off, instead of making a great big fuss about it? Because the benefit had been set to a fixed number of dollars, which had never been increased over the years. And I just didn't think an extra $1,500 a year would make any life-changing difference in my kids' college decisions.

It was still a broken promise, though.
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Post by grumel »

Its not hard to solve the problem. Just force companies to put so much money in the pension plan and invest the money so conservative that there is still enough money left if the company goes broke and the stock market is doing bad.

Right now it seems a company can pull any out of thin air expected return number and call the plan well funded, as long as the money is enough if the expected return is met. Now if the number is to high or even if the number is reasonable and the markets do below average which they do 50% of the time (normal distributed returns asumption here, otherwise things get rather worse not better) theres not enough money left in the pension plan. Correct me if i am wrong with that asumption. Would love to see any details.

That solution is admitly not viable on a makro level if every worker arround the world has a generous pension promise and world population stays constant, since in that case, there simply would not be enough productive capital left arround the world to invest in. As it stands now, such a debate is however about as usefull as the one about what happend if everyone indexed, since reality is so far from that situation.
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Post by Fear and Loathing »

It is just another method to enslave the masses by the corporate elites.....
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Post by Wagnerjb »

kb0fhp wrote:It is just another method to enslave the masses by the corporate elites.....
Go form your own company, and offer a defined benefit plan. You will attract all the best talent, and you will outperform those companies where the masses are being enslaved. You will be fabulously wealthy. That is the benefit of living in a free society...the freedom to compete.

Competition forces you to offer appropriate benefits.

Best wishes.
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Post by greg24 »

metabasalt wrote:As an employee of a company currently in Chapter 11 proceedings and with a Multiemployer pension plan, fully funded until last year, I wonder if anyone has any advice on whether it makes sense to leave work and take the pension while it is still available.
Start a new discussion thread about your question, its just gonna be buried in this discussion. :D
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Post by Fear and Loathing »

Wagnerjb wrote:
kb0fhp wrote:It is just another method to enslave the masses by the corporate elites.....
Go form your own company, and offer a defined benefit plan. You will attract all the best talent, and you will outperform those companies where the masses are being enslaved. You will be fabulously wealthy. That is the benefit of living in a free society...the freedom to compete.

Competition forces you to offer appropriate benefits.

Best wishes.
Actually - I would go to China or India and use the people as contract people. There they at least are pleased that they can get a job and be paid in a currency that is worth something (Yuan).....

You missed the intent of my comment (and the sarcasm) - But being the appropriate corporate clone you backed up the corporate intent of the 401(k) plan and similar systems, while wrapping yourself in the flag. They are designed to perform poorly. They are designed to steal money from people contributing. It is a device to keep keep people worried about retirement and to accept what ever term that are offered. It is a method of enslavement.

The 401(k) system was not designed to help people - it was merely provided so people have the delusion of that they will someday retire. It was deliberately done to steal money from contributors by either high fees or gross mismanagement. But I would argue that the gross mismanagement is more deliberate in nature and designed to separate the money from contributors and line the pockets of "plan advisers" and the managers that establish such plans.
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Post by Jack »

kb0fhp wrote:The 401(k) system was not designed to help people - it was merely provided so people have the delusion of that they will someday retire. It was deliberately done to steal money from contributors by either high fees or gross mismanagement. But I would argue that the gross mismanagement is more deliberate in nature and designed to separate the money from contributors and line the pockets of "plan advisers" and the managers that establish such plans.
Actually, 401(k) plans were originated in 1978 to allow highly paid executives to defer taxes on their high incomes. It wasn't until 1984 that the rules were modified to include non-discrimination rules that prevented the plans from being skewed in favor of highly compensated employees. They weren't intended to be used by lower level employees at all.
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Post by Valuethinker »

Mitchell777 wrote:I think it's a good bet that DB plans dissappear in the private sector. Small companies could not afford them even if they wanted them and the continuation of any small company is often in question. It's much cheaper even for a large employer to toss 3% each yr into a 401K rather than have a DB plan. I work for a company with tens of thousands of employees. Only one person has a DB plan. I'll leave it to your imagination to figure who (no it's not me). Tough part is that while people in the private sector must put aside more of their own money for retirement, they will also need to pay increased taxes to
make government DB pensions whole. It may be a real struggle in some areas of the country. My city, state, and county politicians have already thrown out the hint that tax increases are coming due to losses in pension plans
I don't have much notion of how the US PBGC works.

I can tell you in the UK, you receive a higher degree of protection, generally, if you are retired.

You should, as the other poster advises, post this as a new thread, perhaps under the personal investment advice?

There is a *lot* of expert knowledge on this forum (including, at least at one point, the man who as Senate staffer added stocks to the US government TSP).

But in this thread, you will get buried.
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Post by freedomfunds »

Even with in salaried employees, I don't think many private sector companies have defined benefit plans. They are going out of fashion because of the liability it puts on employers.

401ks, although never intended are the new vehicle. Although I agree defined benefits are too much of a burden, some, ALOT of employees don't know how to manage their 401ks.

I think a lot of the mutual fund hullapalooza with higher expenses, stupid marketing, can be traced to the increase in 401ks.

Especially turnover rate, since 401ks don't care about that.
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Post by ruralavalon »

Mitchell777 wrote:I think it's a good bet that DB plans dissappear in the private sector. Small companies could not afford them even if they wanted them and the continuation of any small company is often in question. It's much cheaper even for a large employer to toss 3% each yr into a 401K rather than have a DB plan. . . . . Tough part is that while people in the private sector must put aside more of their own money for retirement, they will also need to pay increased taxes to make government DB pensions whole. . . . .
I think that Mitchell777 has stated the facts accurately. I am part of a smal LLC with no DB plan. A DB plan was never really a choice because of our size and the expense. IMO we must all get used to the idea of working longer (no "30 and out" for anyone), and used to the idea of contributing significantly to our own retirement thru the best combinations of IRAs and employer based plans that are available to us.
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Post by asset_chaos »

I've noticed a certain amount of "worship" of defined benefit (db) plans because they are supposed to give certainty to the participant by eliminating market risk. Most of the people who pine for db plans don't seem to recognize that participants have simply traded one kind of risk for another. For the duration of participants' (and maybe their spouses') lives that company has to remain in buisness at a level of revenue generation that will support the promises. (Most db plans require fresh cash input every year.) That could be 70 or 80 years between the promise being made and delivery of the last check. There are not all that many companies, as a fraction of all companies, that have or will exist as going concerns for that long. But it's not very long a time to believe a government---at least western democratic governments---will exist. So db doesn't seem to me to be any less risky than defined contribution for employees in the private sector. But they do seem to be less risky for public sector employees. And I suspect that's how db plans will go: they'll die out in private sector and be a feature to attract and retain in the public sector.
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Post by LH »

Annuities are the newish incarnation of defined benefit plans.

Heck, defined benefit plans are EASY, just have them all start at age 65, pay into an annuity for your employee, and viola, case closed right? Annuities are safe. No annuity payment has ever been not made its said. Why not just have the companies pension plan buy an annuity, that would just take care of it right? Hmmm. I do not think so.

To me, defined benefit plans, and annuites, are basically the same thing, except that annuities have the reverse life insurance thrown in, which does provide benefit... But, pension plans likely have that as well do they not? When someone dies, he no longer gets his pension? That money, which would have been paid out, can now go to earn interest, and pay the living pensioners benefits..... Geesh. Annuities and defined pension plans seem even more similiar than I thought.

I just do not see how defined benefit plans are not working, yet annuities are just going to end up working so well.

There is no free lunch, even the US government will not be able to fulfill its annuity promise to me via SS.

Are the state pension plans going to have to cut back thier benefits? They are purportedly in trouble now.

ANY entity, which promises you an income stream going forward, you had better think HARD about the risk of not recieving it as promised. The longer you have going forward, the more risk there is.
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Post by On Approach »

When someone dies, he no longer gets his pension? That money, which would have been paid out, can now go to earn interest, and pay the living pensioners benefits..... Geesh.
With my DB pension, I elected full survivor continuance for my wife, and I only had to take a 9% cut in benefits. I wonder what kind of hit you'd have to take with an SPIA if you elected for such an option (if available).
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Post by Valuethinker »

LH wrote:Annuities are the newish incarnation of defined benefit plans.
.
Actually annuities are much, much older than pension plans.

Pension plans probably date from Bismark in the 1880s in Germany. Seeking to undermine the Catholic Church, he introduced a universal state pension.

Annuities date from the 17th century, at least.

Annuitization of a pensioner is a pretty normal strategy. When you retire, the pension fund normally buys an annuity from an insurer (this varies by scheme, but it is the normal principle of hedging longevity risk as a pension fund).

This is also true when you leave a pension scheme with deferred benefits, or when the pension scheme is closed to new members.
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Post by Valuethinker »

ruralavalon wrote:
Mitchell777 wrote:I think it's a good bet that DB plans dissappear in the private sector. Small companies could not afford them even if they wanted them and the continuation of any small company is often in question. It's much cheaper even for a large employer to toss 3% each yr into a 401K rather than have a DB plan. . . . . Tough part is that while people in the private sector must put aside more of their own money for retirement, they will also need to pay increased taxes to make government DB pensions whole. . . . .
I think that Mitchell777 has stated the facts accurately. I am part of a smal LLC with no DB plan. A DB plan was never really a choice because of our size and the expense. IMO we must all get used to the idea of working longer (no "30 and out" for anyone), and used to the idea of contributing significantly to our own retirement thru the best combinations of IRAs and employer based plans that are available to us.
This is a slightly different issue.

In the sense that the problem is what was desirable about DB plans (predictability of outcome) has been lost.

The 401k is clearly no substitute, because it doesn't give any predictability of benefits or outcome.

So something a la the Dutch (average salary) or the Swiss (effectively, a targetted minimum return) funds will probably come in.

In addition, I suspect it will be universal. There will be no choice about having a percentage of your salary lifted off and put into a pension scheme. This is where the Australians (and the Swedes, and the Chileans, and shortly the UK) are at.

How we get to a world where everyone working puts 15% of their gross income (between them and their employer) into a pension scheme, to give an average 65% replacement of income in retirement, is an interesting question. But I think we will get there.

I agree though that part of the solution will be to work more years.
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Post by tutaloo »

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Post by Ron »

On Approach wrote:With my DB pension, I elected full survivor continuance for my wife, and I only had to take a 9% cut in benefits. I wonder what kind of hit you'd have to take with an SPIA if you elected for such an option (if available).
Since you asked; for me it was about a 10% difference in payout for a single life vs. 100% full payment to either my wife/me. Additionally, it is a 28-year minimum payment policy (if we both pass within that time, it goes to our estate - either as a lump sum or continued monthly payments. BTW, if either/both survive beyond 28 years, the monthly payments continue at 100%).

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Post by Ron »

Valuethinker wrote:The 401k is clearly no substitute, because it doesn't give any predictability of benefits or outcome.

I agree though that part of the solution will be to work more years.
The 401k alternative over the two DB plans that were replaced (in addition to my own IRA contributions) were actually a bit superior in the end result over what would have been a DB benefit plan, upon my retirement.

I'm not saying that I'm "typical" at all (yea, I'm probably one of those black swan thingies :lol: ) but assuming that one takes the time to understand a bit of how they work, they can be an avenue to a good retirement.

For those that want to sit back, not give a dam* about their future, any contributitory/investment plan will not work. However, for those that are willing, there is a possibility to meet - or even exceed what a DB plan would have provided. How do I know this? When I had a DB plan, it was equal to the union employees of the company I retired from. As their retirement benefit increased over the years, I could calculate what my draw would be (on my own) against their plan.

Today (retired 2 years, before the age of 60) my "draw-down" in assets well exceed what I would have (presumably) been.

So the 401k plan worked in my case; I make no apologies.

- Ron
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Post by Kenkat »

LH wrote:To me, defined benefit plans, and annuites, are basically the same thing, except that annuities have the reverse life insurance thrown in, which does provide benefit...
There is a very big difference between a defined benefit plan and an annuity. A defined benefit plan (and social security to an extent) makes the promise at the beginning. An annuity makes the promise at the end.

What I mean by this is that on Day 1 of your employment, the pension benefit is promised to you - x% of salary times y years of service typically. Now, the company has made a promise and then has to start funding that promise to you without having any real idea how much it will cost them to do that. They don't know what the financial market will be when you retire nor will they know how successful the company will be in the future. So, they have made an upfront promise to you without knowing the future. They have promised you x amount per month but honestly can only estimate how much they will need to fund that when you finally retire.

Annuities are different in that you have a set amount of money that you are giving to the insurance company for a set benefit. And you are saying at a very specific time, I have x dollars, how much can you pay me per month. The insurance company can look at existing rates, existing longevity projections, and quote you an amount. They then go out and buy obligations such as bonds to cover that amount plus a reserve amount to protect against differences in longevity or short-term changes in financial markets. Insurance companies have gotten very good at managing this risk, with many companies having been in existence for 100 or more years.

So, with a defined benefit plan, the benefit amount is defined at the beginning of the savings period based on an unknown final dollar amount; with an annuity, the benefit amount is defined at the end of the savings period based on a known final dollar amount.

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Post by George-J »

Valuethinker wrote: -- The risk of underperformance is perhaps more correctly stated as 'the risk that fund performance + contributions won't meet contractual liabilities'. ....
At my institution, the real issue is the years of "missing contributions" in our defined benefit plan. The annual service cost was about 15%. But 15% was not contributed. The employer - who is also the plan administrator- sets the plan assumptions.

I believe that the temptation to use overly optimistic actuarial assumptions (in a DB plan) for future returns has turned many defined benefit plans into pension Ponzi schemes. See Inconvenient Truths II- and missing pension contributions

This cumulative long term effect is missed if one only looks at the last annual report for a pension plan.

Note added - In the preview my live link attempt does not seem to work properly. I dunno why. If so then go to the pdf file link via -
http://utfa.org/images/file/Inf%20Rep-9 ... l-c(1).pdf
or via the link at
http://utfa.org//index.php?option=com_c ... Itemid=102
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ruralavalon
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Post by ruralavalon »

valuethinker wrote:How we get to a world where everyone working puts 15% of their gross income (between them and their employer) into a pension scheme, to give an average 65% replacement of income in retirement, is an interesting question. But I think we will get there.
Actually, that is very close to what I am required to pay now, 6.2% as the employee plus 6.2% as the employer = 12.4%. http://www.ssa.gov/pressoffice/colafacts.htm .
valuethinker wrote:I agree though that part of the solution will be to work more years
In the auto industry, they adoptecd "30 and out" meaning that someone who hired into the plant at age 20 would get full retirement benefits at age 50. The life expectancy at age 50 would be 32.25 years-- http://www.ssa.gov/OACT/STATS/table4c6.html -- , illustrating the great difficulties faced by such a defined benefit plan. Working longer is a large part of the solution, for any type of retirement plan.
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Opponent Process
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Post by Opponent Process »

I guess it's because I'm younger, but as others have hinted at in this thread, I still don't understand how people can seriously think that DB gravy trains are sustainable. You work for 20-30 years, you stop working, but you expect to still get paid for the rest of your life (including health insurance in some cases) for doing nothing? Many people are now living longer post retirement vs. pre. Doesn't this spell disaster? I realize people had just become accustomed to being treated like that, but that's all it is - entitlement. And maybe at one point it was used to just recruit the best talent, but that became a slippery slope, and soon anyone who could fill a spreadsheet or bolt a car door felt entitled to a DB plan. Now that the model is showing it's weaknesses people are complaining? That's natural and I do sympathize with honest and loyal workers that are left holding the bag, but was this really so hard to see?
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
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Valuethinker
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Post by Valuethinker »

Opponent Process wrote:I guess it's because I'm younger, but as others have hinted at in this thread, I still don't understand how people can seriously think that DB gravy trains are sustainable. You work for 20-30 years, you stop working, but you expect to still get paid for the rest of your life (including health insurance in some cases) for doing nothing? Many people are now living longer post retirement vs. pre. Doesn't this spell disaster? I realize people had just become accustomed to being treated like that, but that's all it is - entitlement. And maybe at one point it was used to just recruit the best talent, but that became a slippery slope, and soon anyone who could fill a spreadsheet or bolt a car door felt entitled to a DB plan. Now that the model is showing it's weaknesses people are complaining? That's natural and I do sympathize with honest and loyal workers that are left holding the bag, but was this really so hard to see?
Actually the history is rather interesting, having much to do with Walter Reuther.

In the period during WWII and after, labour was in short supply. A good DB scheme was a way of keeping labour and retained skilled workers.

We were a long way from a world where you could outsource off shore, and a long way from a world where companies didn't expect to be around in 10 years.

http://www.gladwell.com/2006/2006_08_28_a_risk.html

the problem with a 401k is you have risk transferred to those least able to bear the risk.
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Post by Valuethinker »

ruralavalon wrote:
valuethinker wrote:How we get to a world where everyone working puts 15% of their gross income (between them and their employer) into a pension scheme, to give an average 65% replacement of income in retirement, is an interesting question. But I think we will get there.
Actually, that is very close to what I am required to pay now, 6.2% as the employee plus 6.2% as the employer = 12.4%. http://www.ssa.gov/pressoffice/colafacts.htm .
Although with a huge proviso.

You cannot go from a PAYGO system like SS, to a fully funded pension system, without one generation 'paying double'.

The previous generations were funded PAYGO and the future generation can (conceptually) be funded by a DC scheme BUT

- you still have investment risk
- you can't magic up a return over PAYGO, just by investing in riskier assets (a DC scheme that invested in inflation linked government bonds, only, would be equivalent in its economic effects to a PAYGO scheme) because you also take on the risk of benefits not being what was expected.

What SS is is a baseline system of insurance: insurance for widows, insurance for the disabled, insurance for the poor, those who go bankrupt, careers don't work out, etc.

The US poverty rate drops in old age. Before SS, it was common for retirees to be impoverished, and normal for them to live with their children. Those widows took on lodgers for a reason. If you can get to old age in America, you can probably avoid poverty.

So the 15% is on top of the SS PAYGO.

Which is why it is hard to get there from here.


valuethinker wrote:I agree though that part of the solution will be to work more years
In the auto industry, they adoptecd "30 and out" meaning that someone who hired into the plant at age 20 would get full retirement benefits at age 50. The life expectancy at age 50 would be 32.25 years-- http://www.ssa.gov/OACT/STATS/table4c6.html -- , illustrating the great difficulties faced by such a defined benefit plan. Working longer is a large part of the solution, for any type of retirement plan.
[/quote]

Macroeconomically, whether you have PAYGO or a 'funded' system, you still get down to a ratio of active labour force v. inactive.

If the inactive labour force grows, then tax rates can go up, or conversely labour can get higher wages from employers (the split of corporate profits between shareholders, debtholders and labour force tilts towards the labour force). Either way, those working have to be compensated more.

Japan might be seeing this already. As the labour force shrinks, assets are sold, driving down asset prices.
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Post by PatrickS »

Opponent Process wrote:I guess it's because I'm younger, but as others have hinted at in this thread, I still don't understand how people can seriously think that DB gravy trains are sustainable. You work for 20-30 years, you stop working, but you expect to still get paid for the rest of your life (including health insurance in some cases) for doing nothing?
Get a job in California as a prison guard at age 25. Work 25 years and retire at age 50 with a pension of 90% of your high salary, cola, and medical benefits. Worked for my cousin (retiring soon). I suspect the government pensions will be the last to go, but even those can't last. We're building up too much liability.
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Post by Valuethinker »

PatrickS wrote:
Opponent Process wrote:I guess it's because I'm younger, but as others have hinted at in this thread, I still don't understand how people can seriously think that DB gravy trains are sustainable. You work for 20-30 years, you stop working, but you expect to still get paid for the rest of your life (including health insurance in some cases) for doing nothing?
Get a job in California as a prison guard at age 25. Work 25 years and retire at age 50 with a pension of 90% of your high salary, cola, and medical benefits. Worked for my cousin (retiring soon). I suspect the government pensions will be the last to go, but even those can't last. We're building up too much liability.
Based on Roger Lowenstein's book, at least, this is very true.

ie that public sector schemes are too generous, and also that this will not last.
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stratton
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Post by stratton »

A darned if you don't scenario.

A friend working at a large hospitial in Seattle at the last union negotions wanted to take the offered 401K settlement in place of the pension plan. The union voted to retain the pension. Her reason was the "rate of cuts" for the pension on existing retirees and new hires made it very apparent the offered 401K lump sum would decline in the future and there might even be a forced conversion at unfavorable "rates."

Paul
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Valuethinker
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Post by Valuethinker »

stratton wrote:A darned if you don't scenario.

A friend working at a large hospitial in Seattle at the last union negotions wanted to take the offered 401K settlement in place of the pension plan. The union voted to retain the pension. Her reason was the "rate of cuts" for the pension on existing retirees and new hires made it very apparent the offered 401K lump sum would decline in the future and there might even be a forced conversion at unfavorable "rates."

Paul
The retired or those with long service played off against those with significant careers ahead.

Hence my search for an 'average salary' type solution, which would provide some of the good features of a DB plan (not loading income risk on those least able to assume it) and some of the advantages of DC (portability, no financial risk to plan sponsor).
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Post by grumel »

PatrickS wrote: Get a job in California as a prison guard at age 25. Work 25 years and retire at age 50 with a pension of 90% of your high salary, cola, and medical benefits. Worked for my cousin (retiring soon). I suspect the government pensions will be the last to go, but even those can't last. We're building up too much liability.
My father was done in less than 25 years with his nighshifts as police officer. He was getting sick, could not do it anymore. Was almost forced into retirment before he became a day only office job. I dont know which percentage exactly of his old salery his pension would have been. Think relativly high mabye 60%. Still not that much, considering such public servant careers are only competitive paid over ones work life due to the high pay at the end of the career which is also the basis for the pension. Such jobs become high risk without safety net since they require high qualified people with a very specific education and job expirience largely useless in other fields.
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Post by schwarm »

tutaloo wrote: ...

And this is true for our government social safety net as well. In the beginning it was set up as an annuity. In the late 80's, what had been invested for the future became general spending money making this promised pension plan a Ponzi scheme. If for some reason this is changed, for instance, so that higher income workers pay in more, but their eventual payout is not also raised - it will become a welfare scheme, something most of us find distasteful, if we have any other choice.

...
- I don't think it was set up as an annuity back in the 1930's. SS was not intended to be an investment, its a transfer payment from those who are working to those who did.

- I don't think you pay SS on income over a certain amount, so higher income workers pay in relatively less.
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Post by sgr000 »

Valuethinker wrote:
LH wrote:Annuities are the newish incarnation of defined benefit plans.
Actually annuities are much, much older than pension plans.

Pension plans probably date from Bismark in the 1880s in Germany. Seeking to undermine the Catholic Church, he introduced a universal state pension.

Annuities date from the 17th century, at least.
Almost certainly older than that. The root is from the Latin annua, an annual payment purchased by a lump sum. So at least back to imperial Roman times. Domitius Ulpianus made early mortality tables to support annua pricing.

Or you could refer to the medieval tontine, which combined annuities and lotteries. Interesting incentive to murder the other interest-holders in the tontine, though... gotta be a few interesting stories in there somewhere.
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Post by jh »

...
Last edited by jh on Sat May 02, 2009 10:16 am, edited 1 time in total.
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Boglenaut
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Post by Boglenaut »

jh wrote: I work for the "government". If I didn't, I would not want a pension. You can't trust a private company to uphold their end of the bargain. For private industry I see no going back to the pension days.
You can't trust the government either.

SS used to pay for kids in college if you died. That was part of the insurance aspect of it. People paid into it counting on that insurance for their kids.

They stopped it when I was two years into engineering school.... no grandfathering for students who had already started.

Some insurance. At least you could sue a private company.
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Post by On Approach »

The 401k alternative over the two DB plans that were replaced (in addition to my own IRA contributions) were actually a bit superior in the end result over what would have been a DB benefit plan, upon my retirement.
In my case, my partially COLA'd DB pension was frozen at a contract change. The new employer offered a 401(k) through Fidelity with a 100% match on the first 6% and a 5.5% employer contribution even if the employee did not contribute. I decided to start drawing my pension at age 53-1/2 with only 37% of my highest 3-year average salary. It was enough to meet our basic living expenses in retirement, even with the 100% survivor continuance. And because I had about 6 years left in my career before retirement, I could save enough additional in the 401(k) and other investments to pay discretionary expenses, travel, and unexpected health care.

Even though my pension was frozen, I looked at this situation favorably, in terms of diversification. Pension to pay basic expenses, with nothing left over after my wife and I eventually kick the bucket, and retirement savings that could pass to our sons if any is left over. With the pension and no 401(k), and retiring at 60, my pension would have been 74% of my highest 3-year average salary - a lot more than my wife and I would need - but when we were both gone, potentially no retirement savings balance to leave to our sons.
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LH
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Post by LH »

Valuethinker wrote:
LH wrote:Annuities are the newish incarnation of defined benefit plans.
.
Actually annuities are much, much older than pension plans.

Pension plans probably date from Bismark in the 1880s in Germany. Seeking to undermine the Catholic Church, he introduced a universal state pension.

Annuities date from the 17th century, at least.

Annuitization of a pensioner is a pretty normal strategy. When you retire, the pension fund normally buys an annuity from an insurer (this varies by scheme, but it is the normal principle of hedging longevity risk as a pension fund).

This is also true when you leave a pension scheme with deferred benefits, or when the pension scheme is closed to new members.
yeah.

They are the newest incarnation of db plans in that people will believe they will work. That the "gaurentee" is really a "gaurentee." Its the same game by a different name. Its kinda like the tulip craze, and the internet craze, both functionally the same thing.

Here you have a company, taking money now, paying it to people/companies now in terms of fees and such, to "gaurentee" much LATER an income stream.

Defined benefit plans have fallen out of favor, because they have not worked. Ah but anuities! Yeah, they will work. I predict In 20-40 years, annuities will fall out of favor, having had a crisis (much like SS annuity is failing) and then people will be sold "defined benefit plan" under another name most likely. Rinse repeat.

I just see very little functional difference between annuities and defined benefit pension plans. Pension plans, annuity, and SS equivelents have likely been around since the start of human civilization, in some form or another.

Whats important to look at, is what are the functional differences between these defined benefit plans that are failing, and the annuity plans that are now coming in vogue.... Not much. 20-40 years later, there is real risk you will not have the promised "guarenteed" money. So the CW is that defined benefit plans do not work well, but annuities will work well going forward 40 years. Just pay attention to past history of these things. If they failed going forward, do not be surprised, be diversified.
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manos
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Post by manos »

What about DB plans for state employees? How will they fare?

Manos
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Post by Valuethinker »

manos wrote:What about DB plans for state employees? How will they fare?

Manos
Roger Lowenstein's book on pensions is worth a read.

The answer is almost certainly cutbacks, but bloody and painful ones, politically.

The promises made are just too large for future taxpayers to pay that burden, therefore they will be changed.
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ruralavalon
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Post by ruralavalon »

manos wrote:What about DB plans for state employees? How will they fare?
My guess is that taxpayers (who increasingly do not have DB plans) will not want to pay for DB plans for public employees. My guess would be that DB plans for public employees that are funded by those public employees will continue, and those funded by tax dollars will not.
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