Question on Company Pension Plans

[street]

This maybe a very stupid question and it may have been talked about here but have not seen it.
A company that has a pension plan for their employees does the market have much effect on that plan? So, in all these good time of rising markets will their pension plan change with the up and down of the markets or is that plan directed toward an end point regardless of change in markets.?

Thanks

 

[Midpack]

Typically pensions or defined benefit plans pay out $X/month for each eligible employee, no matter what markets do. The $X is often a percentage of the employees salary/years of service, and it may have a COLA or not. The total projected pension liability can be calculated to determine how much the company should have to meet their pensions obligations. When returns are better than expected, the company can contribute less than planned and when returns are less than expected, the company should contribute more. But it’s not actually that straightforward and there are (dangerously) underfunded pensions public and private. There are also laws, ERISA for example. But pension plans can be changed or even eliminated (like mine was). Defined benefit plans are increasingly rare in the private sector, most have been replaced with...

“Pensions” that fluctuate with markets are known as defined contribution plans, e.g. 401k’s. Typically the company puts in their $ contribution, the employee puts in their $ and chooses the investments (usually from a limited number of funds), and the payout is influenced by markets. The payout is a lump sum the employee can take on retirement or it can be converted to an annuity and pay out like a traditional pension.

https://en.wikipedia.org/wiki/Defined_benefit_pension_plan

https://www.dol.gov/general/topic/health-plans/erisa

https://en.wikipedia.org/wiki/Defined_contribution_plan

 

[street]

Midpack, thanks for that detailed explanation. That is what I thought and how it worked.

 

[SecretlyFI]

Very good explanations above. Here’s an additional possibility. My traditional defined benefit plan was frozen. Whatever was “earned” based on the calculation using age & years of service was locked in, to what they call Part 1 of the plan. Then Part 2 began, which is a hybrid of defined contribution & defined benefit. Company contributes a fixed percent of your salary (like a 401k match, but the employee doesn’t contribute anything). The funds earn a fixed 4%. So in that way, they still call it a defined benefit because they can accurately predict what it will grow to by a retirement date.

The aspect I don’t like is that Part 2 limps along at 4% while the market is doing great. The company is probably making money on this because they have it invested in the market, but they only have to pay out 4%. It’s truly like a bank savings account.

The good news is we’ve also had a traditional 401k alongside the pension plans, so the employee does control the investments there.

 

[pb4uski]

I was about to respond that markets don't affect defined benefit pension plan assets much because they are mostly bonds... my pension plan's assets are 93% fixed income.

But I then found some data that pension plan assets as reported included significant investments in stock, so the increase in the stock market should benefit those plans... increasing funding and in some cases reducing needed company contributions... tho our contributions were more driven by taxes than funding as I recall.

 

[street]

Thanks everyone. That is interesting if the companies get supplemented in good times so less from their pockets.

 

[38Chevy454]

Very good explanations above. Here’s an additional possibility. My traditional defined benefit plan was frozen. Whatever was “earned” based on the calculation using age & years of service was locked in, to what they call Part 1 of the plan. Then Part 2 began, which is a hybrid of defined contribution & defined benefit. Company contributes a fixed percent of your salary (like a 401k match, but the employee doesn’t contribute anything). The funds earn a fixed 4%. So in that way, they still call it a defined benefit because they can accurately predict what it will grow to by a retirement date.

The aspect I don’t like is that Part 2 limps along at 4% while the market is doing great. The company is probably making money on this because they have it invested in the market, but they only have to pay out 4%. It’s truly like a bank savings account.

The good news is we’ve also had a traditional 401k alongside the pension plans, so the employee does control the investments there.

At one of my old employers, there was no pension plan for me, but the company did contribute 6% of salary to my 401k. This was what I called the "pension offset" since older employees had grandfathered in pension plan, traditional defined benefit type. Company put 6% i nto employees 401k instead of the (assuming equal) 6% into the broad pension plan account. The 6% "pension offset" was put in regardless of what an employee saved themselves or the company match part of that employee savings. The 6% was invested however I wanted, within the fund choices available in the 401k plan. So I did not have that fixed 4% return that SecretlyFI is stuck with.

 

[pb4uski]

Our firm had a DC plan like that.... firm contributed a percentage of pay... increasing percent based on seniority... mine was a sweet 8%... and we could control what it was invested in... same options as our 401k plan.

 

[Mulligan]

I was about to respond that markets don't affect defined benefit pension plan assets much because they are mostly bonds... my pension plan's assets are 93% fixed income.

But I then found some data that pension plan assets as reported included significant investments in stock, so the increase in the stock market should benefit those plans... increasing funding and in some cases reducing needed company contributions... tho our contributions were more driven by taxes than funding as I recall.

Yes, the 40 plus billion pension system I am in invests differently. And they largely are investing for the people entering their career not the ones about to or are retired.
28% Public Equity
16% Non US Public Equity
14% US Treasuries
12% Hedged Assets
12% Private Equity
8% Private Real Estate
4% Credit Bonds
3% TIPS
2% Cash
1% Private Credit

 

[Offgrid Organic Farmer]

I have a military pension. It is effectively a 'defined benefit plan'.

When I was on Active Duty I got 'Base-pay' along with a dozen small miscellaneous allowances and bonuses.

My monthly pension is 50% of my Base-pay.