I was passed this article by a friend who has a predilection for pensions (as I do). The Americans have yet to discover the CDC variant as their “pension” has the guarantees of what we call “defined benefit. But the motivation to move away from their workplace DC plan (401K) and something
Pensions Were on the Brink of Extinction. Now Companies Are Bringing Them Back.
Some companies are turning to the lost benefit to recruit employees or settle negotiations with labor unions
Pensions were on their way to becoming a relic in corporate America. Now some companies are bringing them back.
The lost benefit is being revived by a small but growing number of companies to settle negotiations with labor unions or win over employees in fields where recruiting and retaining workers is especially competitive.
Matthew Cronin, 27 years old, is among the 600 workers who recently won the benefit from PECO, Pennsylvania’s largest electric and natural gas utility. He plans to keep contributing to his 401(k), but is counting on the pension to help offset the cuts to Social Security he’s anticipating.
“Having a pension is a big motivator to staying with the company,”
said Cronin, a consultant for PECO who helps customers connect to the grid.
Matthew Cronin
Other employers reopening or starting pensions include IBM, meat processing giant JBS Foods and Northwell Health, a major medical system in New York and Connecticut.
Unlike 401(k)s, pensions are typically paid for by employers and offer a retirement check for life. The plans were hit hard by the 2008 financial crisis, when stocks plummeted and new funding requirements forced many companies to contribute more to shore them up. Many companies froze their plans to stop benefits from accruing, moving employees into 401(k)s.
Less than 10% of private-sector workers participated in pensions in 2024, down from about 30% in 1988, according to the nonprofit Employee Benefit Research Institute. Government workers are much more likely to have one.
But recent changes to some types of pensions have made them less of a financial risk for companies, said John Lowell, a pension consultant at October Three.
Traditional plans generally promise lifetime benefits based on salary and years of service, whether markets rise or fall. To reduce the unpredictability of their pension costs, companies including IBM began converting them to cash balance pension plans in the 1990s.
With this version of pensions, employers credit employee accounts with a preset percentage of pay annually and promise a return that’s often tied to Treasury yields.
Many newer plans instead give workers market-linked returns, similar to a 401(k). That shifts most of the investment risk to employees.
Such changes have reduced many of the funding risks and uncertainties that employers disliked about traditional pensions, said Olivia Mitchell, a pension expert at the University of Pennsylvania’s Wharton School.
We aren’t going back to a pension-based system, but there is
“a selective revival under way,” she said.
In 2023, nearly 26,000 employers—most of them relatively small—had cash balance plans, up from about 23,000 in 2020, according to FuturePlan by Ascensus, a plan administrator.
Market conditions are also pushing companies to rethink pensions, including rising stock prices and higher bond yields, which make it easier to meet future payouts.
Many pensions—both active and dormant—now have surpluses, pots of money they can use to fund pension benefits for current employees. The top 100 U.S. corporate pensions now have enough assets to cover 112% of their liabilities, up from 77% in 2012, according to pension consulting firm Milliman.
Efforts by unions to restore pensions have prevailed at airlines including Delta and Southwest, which recently started cash balance plans for pilots.
“There is a groundswell from the participant side to get these things going again,”
said Zorast Wadia, a principal at Milliman.
Northwell Health started rolling out a pension last summer for nurses and administrative staff.
Earlier this year, meat processing company JBS began contributing to a new pension for its approximately 26,000 hourly workers. Jointly managed by JBS and the United Food and Commercial Workers International Union, the plan is open to workers from other meatpacking companies and currently requires most retirees to take a lifetime income, rather than offering a lump-sum option.
The union said it pushed for the pension because fewer of JBS’s hourly workers, who earn an average of about $24 per hour, were saving in the 401(k) than are in the pension.
Jim Ridderbush, a union steward at JBS’s Green Bay, Wis., plant, said that while the older workers are excited,
“the younger kids don’t really understand what a pension is. It’s a dinosaur.”
PensionsOldie will love this … and perhaps Benefit Jack Towarnicky can fill in more of the details for us on this side of the Atlantic.
The IBM example is interesting. It offers a model for recycling pension surpluses into renewed pension provision, rather than simply treating surplus as corporate money waiting to be extracted.
IBM reopened benefit accrual through its existing US Personal Pension Plan (PPP) from January 2024, creating the Retirement Benefit Account (RBA). This is legally part of its US defined-benefit pension structure.
IBM’s 2023 PPP was substantially overfunded: assets of $24.437bn against projected obligations of $19.854bn, a surplus of $4.583bn.
Because the reopened arrangement is itself a DB plan, future benefit accruals can be financed from the assets already sitting in that pension trust.
IBM cannot use its US pension surplus to pay 401(k) matching contributions, but it can use the economic capacity of that surplus to support new accruals within the DB pension system through the RBA.
DB Pension Plan Baloney!
Contributions to DB pension plans in the states can be contributory or non-contributory. Once upon a time, many were contributory. Many changed to non-contributory after ERISA legislation in 1974 made administration of contributory plans a challenge. Many public employee plans (not subject to ERISA) are still contributory today.
Yes, the employer controls the investments, however, in most of today’s private sector defined benefit pension plans, the organization uses a cash balance formula. There:’
(1) Pension credits are determined each year, and
(2) Accumulated credits receive a fixed rate of interest credit, typically something less than 5% (at least over the past 25 years).
Pension credits are based on salary, and in most plans with cash balance formulas, the crediting rate increases with tenure. Eligibility must occur no later than the January 1st or July 1st after completing a year of service. In plans with a cash balance formula, vesting in the employer contribution and credited earnings occurs at 3 years (at least since the 2006 Pension Protection Act).
However, median tenure of American workers has been less than 5 years for the past 7 decades. So, most workers who participate do vest, however, they typically leave with an accrued benefit of less than $7,000 – which is often involuntarily distributed and rolled over to an Individual Retirement Account. Few DB pension plan participants who are accruing a benefit under a cash balance formula will receive their benefit in the form of a monthly check.
A private sector defined benefit pension plan (other than a church plan) must be insured by the Pension Benefit Guarantee Association, a quasi-government organization. One reason why many firms roll over a small benefit is the PBGC insurance premium, which was once $1 per participant per year and is now $111 per participant per year (even for the most well-funded plans). Keep in mind that the PBGC limits the insurance amount. Where an employer terminates a pension plan that is not fully funded, the insurance often results in a reduction in the accrued benefit.
Those union/management multiemployer plans that were bailed out by 2021 legislation (perhaps the were just starting to undergo the cuts in benefits due to chronic, consistent, intentional, all but fraudulent underfunding. How chronic was the underfunding? Well, it was President Jimmy Carter who signed into law the Multiemployer Pension Plan Amendments Act of 1980 to shore up funding!
Carter, 1980!
In the states:
(1) The number of active participants in private sector defined benefit pension plans in the US has declined from a high of 30,100,000 to 11,077,000 in 2023 – even less today!
(2) Most of today’s NEW DB plans are “combo” plans for small employers, combining a career average, cash balance formula with a DC 401k/401a plan, where the code and regulations allow for an aggressive application of non-discrimination rules such that the owner of the firm receives the vast majority of the retirement benefits.
See: https://saberpension.com/db-dc-combo-plans for an example of who truly benefits from these plans
(3) In terms of joint management plans, where the union and the management are trustees of a plan for union members, the only reason these might be gaining traction was the decision by the Biden Administration to bail out the failing plans – cost to taxpayers, most who don’t have a pension plan, $90+Billion (and the bailout did not solve the structural issues) See: https://www.heritage.org/budget-and-spending/commentary/theres-nothing-equitable-union-pension-bailouts-unmentioned-bidens
(4) With respect to IBM, as best as anyone can tell from a distance, the shift from a match in the 401k plan to resuming accruals in the defined benefit pension plan was a reduction in benefits to workers. See: https://401kspecialistmag.com/db-pensions-continued-life-support-more-likely-than-a-full-recovery/
I love how all of the American retirement industry is agog about the “demand” for “guaranteed income”. As a corporate benefits weenie with 47+ years of experience, one worker confirmed for me what Americans wanted when it came to employee benefits – at that time health coverage. She said: “I want the best health care coverage YOUR money will buy!”
With respect to guaranteed retirement income, she would probably say: “I want YOU to provide guaranteed, inflation-indexed income in retirement that would allow me to maintain my pre-retirement standard of living” … never realizing that employers don’t shoulder the full cost of benefits, workers do. The employer contribution towards the cost of benefits is wages that the employer didn’t pay, or other benefits that weren’t provided.
In the states, the only exception to that rule is the value of the tax preferences applied to certain benefit plans.