Adjustable pension plan design begins to gain converts

[SumDay]

Very interesting article on a "new" plan design:

http://www.pionline.com/article/201...t&utm_medium=email&utm_campaign=weekly_digest

The plan design shares the investment risk between employees and employers while providing more retirement income security than a typical defined contribution plan.

Not really a cash balance, which was my first thought as I started reading it:

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.

 

[Midpack]

Interesting idea that falls between conventional DB and DC. The proposal goes a long way to addressing the education-saving discipline-personal responsibility issues that have plagued 401k's and seemingly eliminates the uncertainty-risk issues that led companies to drop DB plans.

However, I'd hate to see (the indiv tax benefits of) 401k plans go away. And companies that adopt APP plans would presumably end 401k matching and (fairly IMO) put those contributions toward the APP plans instead. I don't see them contributing to both DC matching and adding APP on top of that.

I'd like to see how the APP benefits fluctuate though, the article really didn't seem to shed any light on that...

 

[Independent]

I see a traditional DB plan with "more conservative" investment assumptions. The conservative assumptions lead to lower guaranteed benefits. If the pooled investments can beat the assumptions, the excess is used to increase the benefits.

Employers have less risk than DB plans simply because they are guaranteeing lower numbers. Workers have less risk than DC because there is a floor benefit. Workers have much less flexibility/control than with a DC plan. Some people think that's a good thing.

IMO, one of the biggest problems with US DB pensions is that the benefits are based on some limited "highest consecutive months" salary. In most cases, this backloads the benefit accruals. Workers take a lot of employment risk - losing your job sometime in your 50's can substantially cut your pension.

Years ago, when I was studying for pensions for a financial certificate, I thought I came up with a better plan. Like this Adjustable Pension idea, there was a guaranteed benefit with the potential of using investment results to boost the guarantee. Unlike this idea, guaranteed benefits were based on career average salaries. But, the assumed interest rate was much lower (2.5-3.0%), which made investment gains much more likely.

 

[ziggy29]

IMO, one of the biggest problems with US DB pensions is that the benefits are based on some limited "highest consecutive months" salary. In most cases, this backloads the benefit accruals. Workers take a lot of employment risk - losing your job sometime in your 50's can substantially cut your pension.

Yes, this is often true. In theory, someone working 40 years at one company will probably get a much higher total pension than someone with four pensions with 10 years of service each, assuming identical salaries along the way.

But the biggest problem with DB pensions as we know them is what has made them turn out to feel unsustainable: a guaranteed level of benefits regardless of what happens to life expectancies and the underlying investments of the pension fund. This requires a certain level of funding (which employers often neglect) AND a certain assumed ROI of the pension fund (many of them have expected 8% or more which is IMO not realistic in the long term if the fund has a prudent asset allocation).