Db Plan Case Study
Issue Brief
Who Killed the Private Sector DB Plan? by Ilana Boivie
March 2011
Executive Summary
In recent decades, defined benefit (DB) pension plans have been in decline in the private sector. For example, and to much public attention, in January 2010 General Electric announced that it would be closing its DB pension plan for all salaried employees hired after December 31, 2010. These employees would be given a defined contribution (DC) account contribution of 3 percent of pay.1
The closing of GE’s traditional pension plan to new employees is the latest example of a trend that has been occurring for some time. Since the early 1980s, the number of private sector DB plans has markedly decreased, as has the number of workers who …show more content…
A December 2010 Towers Watson survey found comparable results among current
DB plan sponsors; the three top concerns of DB plan sponsors over the next five years were impact on cash flow, impact on the income statement, and impact on the balance sheet.36 A 2003 Hewitt survey has similar findings— that employers perceive cost volatility as the single greatest threat to the DB pension system.37
Also, a 2009 GAO study found that some 26% of plan sponsors would consider forming a new DB plan if the plan funding requirements had more predictability and less volatility.38 Finally, a 2009 survey of plan sponsors found that, of those employers who remain committed to their DB plans, a full 70% would reconsider this commitment should accounting rules or other regulations become more burdensome than they already are.39
In other words, the reason companies may be freezing their pensions, or hesitant to start new DB plans, is not due to the inherent cost of administering the plan. In fact, in an analysis of the possible reasons behind pension freezes, researchers have found that firms are not motivated by any short-term cost savings that may come from freezing …show more content…
7
One possible way to incorporate third-party sponsorship more broadly has been developed by the ERISA
Industry Committee. The New Benefits Platform for Lifetime Security would allow employers to choose between competing Benefit Administrators in order to offer retirement and other fringe benefits. These Benefit
Administrators would assume the traditional role of plan sponsors, and would be organized on a geographic basis, with regional exchanges possible. The system would be open to both large and small employers in the public and private sectors, and would be governed by rules set by the Federal government.56
Amend Federal Law and Regulations
Since sponsors of frozen DB plans cite volatility of funding and its effect on cash flow as the two the major reasons that the freeze was implemented, one clear solution would involve decreasing the volatility of plan funding.
And because funding volatility has increased largely due to Federal regulations that have been implemented over the last several years, one way to decrease volatility would be to ease funding regulations on private plans.
Who Killed the Private Sector DB Plan? by Ilana Boivie
March 2011
Executive Summary
In recent decades, defined benefit (DB) pension plans have been in decline in the private sector. For example, and to much public attention, in January 2010 General Electric announced that it would be closing its DB pension plan for all salaried employees hired after December 31, 2010. These employees would be given a defined contribution (DC) account contribution of 3 percent of pay.1
The closing of GE’s traditional pension plan to new employees is the latest example of a trend that has been occurring for some time. Since the early 1980s, the number of private sector DB plans has markedly decreased, as has the number of workers who …show more content…
A December 2010 Towers Watson survey found comparable results among current
DB plan sponsors; the three top concerns of DB plan sponsors over the next five years were impact on cash flow, impact on the income statement, and impact on the balance sheet.36 A 2003 Hewitt survey has similar findings— that employers perceive cost volatility as the single greatest threat to the DB pension system.37
Also, a 2009 GAO study found that some 26% of plan sponsors would consider forming a new DB plan if the plan funding requirements had more predictability and less volatility.38 Finally, a 2009 survey of plan sponsors found that, of those employers who remain committed to their DB plans, a full 70% would reconsider this commitment should accounting rules or other regulations become more burdensome than they already are.39
In other words, the reason companies may be freezing their pensions, or hesitant to start new DB plans, is not due to the inherent cost of administering the plan. In fact, in an analysis of the possible reasons behind pension freezes, researchers have found that firms are not motivated by any short-term cost savings that may come from freezing …show more content…
7
One possible way to incorporate third-party sponsorship more broadly has been developed by the ERISA
Industry Committee. The New Benefits Platform for Lifetime Security would allow employers to choose between competing Benefit Administrators in order to offer retirement and other fringe benefits. These Benefit
Administrators would assume the traditional role of plan sponsors, and would be organized on a geographic basis, with regional exchanges possible. The system would be open to both large and small employers in the public and private sectors, and would be governed by rules set by the Federal government.56
Amend Federal Law and Regulations
Since sponsors of frozen DB plans cite volatility of funding and its effect on cash flow as the two the major reasons that the freeze was implemented, one clear solution would involve decreasing the volatility of plan funding.
And because funding volatility has increased largely due to Federal regulations that have been implemented over the last several years, one way to decrease volatility would be to ease funding regulations on private plans.