Pensions for All

A recent brief from the National Institute on Retirement Security, Who Killed the Private Sector DB Plan?, finds the following are the main factors that contributed to the decline in private pension funds:

• Increased regulation, which has had the unintended consequence of impacting both the cash flow of the firm and volatility of plan funding;
• Private-sector industry changes, which resulted in fewer unionized jobs, and fewer new industries establishing DB pension plans; and
• Imperfect knowledge of employee preferences for traditional DB plans.

Despite these problems, traditional pension plans are good for both employees, in ensuring a certain modicum of income security in retirement, and for employers, as they remain a cost-efficient and highly effective recruitment and retention tool. Therefore, several solutions and policy are explored that could reverse the downward trend in pension plans. These include:

• Creating an avenue for third-party sponsorship of the DB plan,
• Amending regulations so that funding is less volatile,
• Finding ways to make it easier for employees to contribute to plan funding, and
• Designing plans so that they are more portable as workers change jobs.

I think a multiple employer set up on a geographic basis might be promising:

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.

Instead of focusing on how to take pensions away from public employees, we should be exploring ways to increase retirement security for all workers. Who Killed the Private Sector DB Plan? is a good start. From a corporate governance perspective, it is critical that a larger proportion of funds in the market are held for the long-term so that shareholders begin to think and act more like shareowners. Pension plans are much more likely to take a long-term perspective than are the funds typically available through 401(k) plans, which are often focused quarter-to-quarter in order to generate fees from more deposits.

See also, How to think about the public pension mess, Salon.com, 3/3/2011.