Pensions not issue for private sector

While state and local governments grapple with the problems presented by underfunded defined-benefit pension plans, it is generally not an issue in the private sector.
The reason is simple. Across the nation, private industry has moved for the most part to defined-contribution pension plans, in which participants rather than sponsors bear the potential risk incurred by market volatility and other factors.
The migration away from defined-benefit plans by the private sector started about two decades ago, according to pension experts in Rhode Island, with retirement vehicles such as defined-contribution 401(k)s taking their place.
Data from the Pension Benefit Guaranty Corporation, an independent government agency that insures private-sector defined-benefit plans, confirms that turnover. From an all-time high of 112,000 single-employer defined-benefit plans across the United States insured by the PBGC in 1985, there were 27,650 such plans in 2009, with 45.2 percent of those plans sponsored by manufacturing firms.
In Rhode Island in 2008, the most recent year for which figures are available, there were 113 defined-benefit pension plans in the private sector, PBGC said, covering 86,260 participants. Total assets of the plans were worth $28 million, with liabilities at $23.4 million, the PBGC said. In Massachusetts, there were 887 defined benefit plans, covering 642,544 participants.
The state-run pension systems cover a total of 59,341 members, with aggregate assets estimated at $8.53 billion and an aggregate unfunded liability estimated at $9 billion, according to information supplied by General Treasurer Gina M. Raimondo’s office.
Among the steps that will be considered this fall when the General Assembly meets to tackle the public pension mess, thanks in large measure to Raimondo’s efforts to fix the system, is a migration paralleling what has happened in the private sector. The $9 billion unfunded liability is Exhibit A as to why the private sector moved away from defined-benefit plans years ago. By changing to defined-contribution plans, a company does not have to carry the pension liability on its balance sheet, where market volatility and ever-longer living retirees could wreak havoc with its financial position, according to Wendy Foster, senior vice president of product management at Fidelity Investments, based in Smithfield.
“The volatile equity markets impact the value of a [defined-benefit] pension trust,” said Foster, in charge of defined benefit plans for Fidelity with 28 years of experience in the field. Since the company assumes the investment risk with those kinds of plans, it must come up with the retiree payments even if the investment does not cover the obligation.
Defined-benefit plans also have become more expensive than originally thought because retirees today live longer than forecast, Foster said,
“There are very, very few defined benefit pension plans being presently run [in the private sector],” said Grafton “Cap” Willey IV, a managing director of CBIZ Tofias and Mayer Hoffman McCann P.C.
Willey is active in small business circles in Rhode Island as a former chairman of the National Small Business Association and co-chair of the Rhode Island chapter of the Smaller Business Association of New England.
“Most of the private-sector plans long ago gave up on defined-benefit plans,” Willey said in a June opinion piece published in Providence Business News. He noted that the federal government years ago moved to retirement plans that include a smaller defined-benefit aspect than previously, integrated with Social Security and defined-contribution plans. He suggested the state should take a similar approach. John C. Gregory, executive director of the Northern Rhode Island Chamber of Commerce, recently sent an email survey to 31 private-sector Chamber members to see what kind of pension plans each has, defined benefit or defined contribution? Only three companies responded, because “most companies do not want to share any information about their pension plans,” he said. And all three have defined-contribution plans.
“It’s getting too expensive,” Gregory said of defined benefit plans. “It’s similar to health insurance. Very few employers today pay for employees’ health plans in full.”
Still, most private-sector defined-benefit pension plans are “probably” funded adequately, said Willey, noting that about 10 years ago Congress enacted laws that require private plans to be funded quarterly and allow amortization of existing liabilities over several years.
One major reason why state governments and municipalities have stayed with defined-benefit plans, according to Foster from Fidelity, is because these plans were negotiated by unions who chose the option that presents minimal fiscal risk to their members. “The municipal plans are so driven by union activity,” Foster said. “It is difficult to negotiate away a long-standing benefit.”
In fact, the Rhode Island AFL-CIO “is opposed to any measure that would force current workers or new hires into defined-contribution private accounts,” according to an undated issue paper on pension benefits on the union’s website. The union maintains it would cost the state $150 million to convert to defined-contributions plans, and adds that it would be more difficult to attract “well-qualified employees to provide important public services” with other plans. •