I have been commending the PPF for what it has done over the past 20 years but there is a question hanging over both it and its sister organisation the FAS. It is well put by “dutifully gentleman” who is known to me and may be known to you for the simple style of address. I know of no more persistent advocate of those who did not get the benefit of PPF.
But Pension Oldie is long enough in the tooth to take a view not just of FAS but of the PPF’s short-comings – read past the first comment.
And Pension Oldie provides us with more food for thought, for the PPF’s drastic levies since formation have been the opposite of a “growth strategy”. This is not political, the early levies were under Labour and since then we have a coalition pension policy (headed by Steve Webb – a Liberal). Since 2016 we have had Conservative and from 2024 we are back with Labour, there is no politics in this, merely a madness that surrounds the security of the PPF which continues to this day.
Rather than let pension schemes take risks, the attitude of Government (DWP and HMT) and regulatory implementer (TPR), has led to an overfed PPF with a surplus of between £7bn to £14bn depending on your measurement. This levy money could be in the hands of employers, the benefits should be in the hands of members. Those who have lost out because of FAS or going further, through no revaluation of pre-97 GMP benefits, have need of recompense – some is being hinted at by our new Pensions Minister.
He needs to understand the impact the PPF insurance mania has had on corporate and trustee strategy. Instead of a “go for it” investment strategy, the result of having paid a substantial insurance premium in the levy, sponsors and trustees have been subject to Section 58(b) of the regulations , making risk-takers criminals and at “risk” of a trip to prison.
What these two elderly but energetic gentlemen are bringing to our attention is the failure of our pension system to allow DB pensions to continue to function. There are a few DB schemes who have found a way to stay open and there are some employers paying defined contributions into savings plans, who want to provide pensions, but the vast majority of employers no longer want a proper pension for their staff. That is a sad change of mood in this country.
The insecurity of having to take all the market risk is what we have left savers with. We have no collective pension system for the majority of people not working in the public sector. The real consistency in pension security goes beyond righting the short comings of the FAS and PPF, it comes when we offer people solid pensions rather then vulnerable pots. I write this after a couple of months when pots have shrivelled under the inanity of US economic policy.
For a given level of benefit an employer sponsored DB pension scheme is the lowest cost way of providing the pension, according to LCP’s analysis. Not only that but in a balance of cost arrangement it is the employer who gains from investment performance outstripping the actuarial assumptions. This creates economic growth in two ways – one the effect of “productive investment” currently so heavily promoted by current and recent Governments; and secondly by reducing the sponsoring company’s employment costs encouraging the Company to grow its own business. I believe it is the latter that is likely to contribute most to the UK economy.
But sadly the employer accounting of FRS 102 or IAS 19 is unsympathetic.
I’m also expecting someone to point out soon that UK DB schemes haven’t suffered too much from recent equity market falls because the typical equity holdings are so much lower these days!
But I would counter the mark-to-marketeers with “earnings are opinion, cash flow is fact”.
In the states, unfortunately, because of failure to adopt and/or enforce ERISA’s funding rules, especially for multiemployer defined benefit pension plans, America’s Pension Benefit Guarantee Corporation (PBGC) currently administers monthly benefit payments for 1+ million participants receiving $6+ billion per year.
Importantly, because PBGC does not guarantee 100% of the accrued benefit, many of those participants suffered a haircut once the liability was transferred to the PBGC. One study in May 2019 of single employer plans showed that
187,013 participants, 16.4% of 1,142,000 studied, saw their accrued benefit reduced an average of 23.6%, with a loss of benefits of $8.5 Billion in present value.
While 31 million of America’s workers, retirees, and beneficiaries are in defined benefit plans insured by the PBGC today, only 11 MM are accruing a benefit (Form 5500 data as of 12/31/22). And, a significant portion of those 11MM are participating in a DB plan with a cash balance formula (a career average pay plan).
Yes, Virginia, two thirds of defined benefit pension plan participants are folks like me, term vested where payout hasn’t commenced, or “retired” and in a payout status.
Look no further than Congress to identify the villain. The majority of America’s 170+MM workers don’t have a defined benefit pension and never will. However, just three years ago, Congress decided to tax American workers (today and tomorrow) to fund a bailout via the “American Rescue Plan Act of 2021, estimated to cost $90+ Billion to be paid by workers who do have a pension, to fund multiemployer pension benefits that were knowingly, perennially, intentionally and deliberately underfunded. Keep in mind that it was President Jimmy Carter who recognized the funding challenge only 5 years after enactment of America’s pension law, ERISA, as he signed into law the Multiemployer Pension Plan Amendments Act of 1980 – yes, 45 years ago.
Per the 2021 bailout, the PBGC has approved 127 bailout applications for $68 billion, and another 22 applications for an additional $2.5 Billion are pending approval.
Bottom line the traditional, final average pay defined benefit pension plan is not a good match for American workers – given that:
– The median tenure of American workers has been less than 5 years for the past seven decades, and
– The median tenure of workers age 50+ is less than 10 years.
As many final average pay defined benefit pension plans use a 5 year cliff vesting requirement, most workers won’t vest. And, among those who vest and reach full retirement age, soon to be 67, a super majority will have a benefit that is based on less than 10 years participation service.
Inter-country comparisons are notoriously difficult, although Mercer do rank countries overall, while the OECD try to unpick aspects in their individual
country surveys.
Two nations separated by a common language …
In the UK, the PPF is “celebrating” 20 years, whereas the US PBGC is over 50 years old.
The UK FAS has 140,000 “members” from 8 years of failed schemes (1997-2005), while the
PPF has around 300,000 members after 19 years of failures.
The PPF acts as a “safety net” for about 9m members with about £1tn of accrued benefits. About 40 % are still in schemes accruing DB or hybrid benefits.
PBGC offers “limited insurance” for about 31m members with about $3tn of accrued benefits. As BJ says above, 11m are still
accruing some form of DB represent about 35% which again is not different from
the UK.
The proportions are not dissimilar, although the historic DB liabilities in the UK are slightly larger.
ERISA 401(k) started in 1978, whereas autoenrolment DC in the UK only started in 2012.
An old US AI-CIO comparison of the two “safety nets” back in 2013 concluded:
“A draw—PPF picks up points for sophistication, while the PBGC lands punches for gamely persevering despite the body blows of falling interest rates on its liabilities.”
Maybe it’s time for someone to update the comparisons?
And perhaps they might like to include some other large countries in the mix, France and Germany perhaps.
L’herbe est toujours plus verte chez le voisin, or Die Rosen sind immer am anderen Zaun.
Thanks for sharing the past comparison. You will need someone much smarter than me for the next one.
But, when they do, please note:
ERISA started in 1974 (with legislation) while 401(k) was added in by 1978 changes to the tax code, but our first 401k wasn’t added until very late in 1981, once regulations were issued. Congress didn’t understand what they had done because the Congressional Budget Office had scored the legislation as adding nothing to the annual deficit.
America had defined contribution plans, contributory and non-contributory, prior to ERISA. For example, my own retirement savings plan (originally a 401(a) plan, now a 401(a) and 401(k) plan, was adopted July 1, 1968.
Autoenrollment wasn’t a factor in America until the Treasury Department went out on a limb in its interpretation of a specific code provision that, most benefits professionals including me, thought participation required an affirmative election.
https://benefitslink.com/src/irs/revrul98-30.html
But, auto enrollment didn’t take off in the states until after passage of the Pension Protection Act of 2006 codified the requirements. My own 401k went out on a limb and adopted/announced automatic enrollment immediately prior to PPA 2006 becoming law, with the change taking effect April 1, 2007.
An old US AI-CIO comparison of the two “safety nets” back in 2013 concluded:
“A draw—PPF picks up points for sophistication, while the PBGC lands punches for gamely persevering despite the body blows of falling interest rates on its liabilities.”
Maybe that describes part of the bludgeoning of defined benefit pension plans in the states, but, the majority of the PBGC’s defined benefit pension plan business comes from intentional, knowing, deliberate and consistent underfunding. Only then could a decline in interest rates and the stock market trigger terminations.
The actual history of PBGC:
Actually, underfunding was not a bug, but a feature of ERISA’s original and intentional design. See: https://digitalcommons.law.buffalo.edu/journal_articles/148/
Specifically page 685-686:
“… The Packard termination convinced UAW president Walter Reuther that the union had to protect members from default risk. One option was for union negotiators to bargain for higher levels of funding. The union rejected this approach because it would require slower growth of pension benefits-which would lead older employees to be less willing to retire-or larger employer contributions-which would result in lower wages for active employees. Instead of addressing default risk through collective bargaining, union pension experts developed a proposal for a government-run insurance program that would guarantee the obligations of defined-benefit pension plans. … the appeal of termination insurance was that it reconfigured the institutional framework of collective bargaining to suit the UAW’s funding practices. Termination insurance would shift default risk away from union members and make it unnecessary for the UAW to bargain for full funding. …”
Bottom line, the UAW added termination insurance to the US legislative agenda as a means to continue to add and improve pension benefits, to promise more than it was prepared to fund via labor negotiations – and management quickly figured it out and played along.
Interesting comment around FAS having been involved as a Trustee and member I would suggest that the then Government tries a few “cheap versions ” of FAS to restrict the cost to the treasury , Having been at consultations I believe the Government tried to keep the costs down and comply with the Insolvency Directive
Steve Webb was and is very supportive and promised a review of FAS and compliance with the law , However it would seem the legal advisors to DWP and PPF agreed . Fortunately Grenville challenge the compliance at great cost and won in the courts
Now just settle the paid for pre 97 issue that I believe the Minister wants to do
I the think the number of PPF members affected by the (Grenville) Hampshire case as it’s better known is quite small? More money for lawyers than members, I suspect. ppf.co.uk/our-members/what-ecj-rulings-mean