There is a new retirement vehicle that limits employer liability while preserving guaranteed monthly pension benefits for employees. See the Adjustable Pension Plan article from Pensions & Investments magazine below.
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| Richard Hudson of Cheiron designed the plan, and he believes both the IRS and Treasury Department eventually will approve it. |
Adjustable pension plan design begins to gain converts Benefits can shrink or grow depending on performance
By Kevin Olsen | April 29, 2013
A new pension plan design that allows employers to drastically reduce their risk while still providing lifetime income to participants is gaining support as an alternative to moving employees into a defined contribution plans.
The adjustable pension plan was conceived by Richard Hudson, principal consulting actuary at Cheiron Inc., New York. Its key difference from a traditional DB plan is that the benefit received each year is adjusted from an original multiplier based on the previous year's investment performance.
The plan design shares the investment risk between employees and employers while providing more retirement income security than a typical defined contribution plan.Earlier this month, Consumers Union, Yonkers, N.Y., reached a collective bargaining agreement with the Newspaper Guild of New York to create an adjustable pension plan that will replace the standard DB plan for Guild members.
The existing plan had about $42 million in assets as of Dec. 31, 2011, according to the company's most recent Form 5500 filing. That plan will be frozen on May 31, and contributions to the adjustable plan will start June 1.
Consumers Union, publisher of Consumer Reports, is the second single-employer plan to switch to the adjustable plan.
Last November, The New York Times became the first with its $280 million plan for employees who belong to the Newspaper Guild.
The very first adopter of the adjustable plan was the Greater Boston Hospitality Employers Local 26 Trust Funds.
The multiemployer plan adopted the new design on Jan. 1, 2012, moving from a 401(k) to a pension plan to provide more retirement security, according to a document on the union's website. Under its plan, participants will receive either a guaranteed floor benefit or the adjustable benefit tied to investment performance, whichever is greater. (The 401(k) plan, which had $35 million as of June 30 according to its latest 5500 filing, is still open, but there no longer is an employer contribution.)
6% contribution
Under the Consumers Union plan, the employer will contribute a fixed 6% of salaries plus $100,000 each year. The New York Times will contribute about $9.5 million to its plan this year and a similar amount after that based on a formula.
“It will vastly reduce risk and volatility for the company and still provide a lifetime payment and PBGC insurance,” said William O'Meara, president of The Newspaper Guild of New York. “We're hoping that this becomes a national model for others to adopt. There is some upside potential and very little downside for employees” compared with participant risks in a defined contribution plan.However, both plans still need approval from the Internal Revenue Service - by July 31, 2014, for The New York Times and March 15, 2015, for Consumers Union. If the plans do not receive approval by those dates, the APP will revert to a new DC plan.An official at the Pension Benefit Guaranty Corp., who declined to be named, said the new adjustable plan sounds like a “great idea.” But the plan won't be covered by the agency unless the IRS says it is a tax-qualified plan. If that designation is granted, it will be treated like any other DB plan, the official said.An IRS spokesman did not respond to requests for interviews. However, Mr. Hudson said he has met with IRS and Treasury Department officials and did not think it would be a problem receiving approval.Sources said the plan design makes sense for employers with union pension plans because they have collective bargaining rights, which can often prevent, or slow, a move to DC plans.
Interest from Maine
Still, the state of Maine is considering the APP for employees and teachers participating in the $11.5 billion Maine Public Employees' Retirement System, Augusta. Cheiron is Maine's actuary.
Maine employees are exempt from Social Security and the Legislature created a task force two years ago to design a supplemental plan for new employees who would also receive Social Security for the first time. The result was a hybrid within a hybrid — half adjustable pension plan and half DC plan.
“Maine would become the first state to enter Social Security from a non-Social Security position,” said Sandy Matheson, executive director of Maine PERS.
The task force has drafted legislation to create the new plan and is awaiting a bill sponsor. Ms. Matheson said it is unlikely the proposal will be picked up during the current legislative session.
“The Legislature had very specific criteria for us to work with,” specifically long-term cost exposure of 2% of salaries, and the task force “agreed on the principles we wanted to see in the plan,” Ms. Matheson said. One percent each would go to the DB and DC components, with a 6.2% contribution to Social Security, equaling a total 8.2% employer contribution.
The state contributes 3.67% of payroll to the state employees and teachers plan in addition to unfunded actuarially liability cost, which equals 11.59% and is expected to increase to 13.43% for the next two years.
The task force wanted to provide new hires with benefits as close as possible to the traditional pension plan, Ms. Matheson said.
Cheiron's Mr. Hudson said a plan needs to immunize retiree liabilities, instead of “letting it ride” on a 60% equity/40% fixed-income portfolio that does not take into account how much of a plan's liabilities are tied up with retirees. There should only be risk in the active group, he added.
Risk transfer
When moving to a DC plan from a DB plan, all the risk is transferred to the employee, Mr. Hudson said.
“Plans increase the risk first and then pass it on to employees. So we said we can do that without increasing the risk,” Mr. Hudson said. “If you can't handle the risk you have, how would (participants) be able to take on more risk on their own?”
Under the APP there is a cut in benefits, Mr. Hudson acknowledged, but much less than with a move to a DC plan — and there is guaranteed retirement income.
“It might be a lower benefit than the traditional defined benefit plan, but at least it's secure,” said the person from the PBGC. The official added that the adjustable plan is more cost controlled than a traditional DB plan and not as dependent on big contributions.
What differentiates the adjustable plan from a cash balance plan is that the cash balance plan benefit is determined by a benchmark such as 10-year Treasuries; the adjustable plan's benefit depends on actual investment performance of the plan.
Bruce Cadenhead, chief actuary for U.S. retirement at Mercer LLC in New York, said the adjustable pension plan is similar to the variably annuity plan design that has been around for decades but differs in that the employer still bears investment risk.
“I think it's something we're beginning to see more discussion about,” Mr. Cadenhead said. “I think (this type of plan) is promising because one of the biggest risks is more people becoming retirement ready that will outlive their money, and this design addresses all those concerns.”
The APP has an emphasis on low volatility and uses a lower discount rate. Mr. Hudson said the goal is get down to around a 6% return target with a standard deviation of about 5.5% to 6%.
'Essential principles'
The important part of the APP is that it includes all the “essential principles” for a new pension plan design such as employer contributions, pooled assets that are professionally invested and lifetime income, said Karen Ferguson, director of the Pension Rights Center, Washington. The PRC is in favor of any DB plan designs that address those principles, she added.
“It significantly reduces the risk to employers and employees,” Ms. Ferguson said. “If the plan doesn't do well, then (participants) won't get a better benefit.”
The adjustable plan idea probably is most appealing to unions because it helps to have bargaining power for better pension plans, Ms. Ferguson said. And unlike other alternative plan designs, the adjustable pension plan does not need legislative approval.
“It's so logical and makes so much sense,” Mr. Hudson said. “When people ask why isn't everyone doing this, I just say, "I don't know.'”
This article originally appeared in the April 29, 2013 print issue as, "Adjustable plan design begins to gain converts".
— Contact Kevin Olsen at kolsen@pionline.com | @Olsen_PI
Robert R. Daraio
Local Representative
The Newspaper Guild of New York
1501 Broadway, Suite 708, NYC 10036
914-774-2646 Cell 212-575-1507 Office
212.730.1531 Fax 914-944-9626 Home
bdaraio@yahoo.com
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