How your pension can disappear, if you are lucky enough to have one

2013

This is a story, a hypothetical one based on fifty years of benefits experience and decades of discussions with CEOs, etc. Unfortunately, this story is what can happen to anyone with a pension, a pension they think they earned as part of their compensation over many years. All it takes to be a true story is one person looking to save money and one person who is short-sighted and looking for a few attaboys.

A large company sponsors a pension plan and has for many years, decades in fact. Suddenly it’s a new day, paternalism as such is over, money and earnings matter most, the short-term takes precedent over any long-term strategy. The result…how can we cut pension costs?

Interest rates are down, pension liabilities increase. The stock market takes a dive, the funding ratio is off. While both are temporary situations that will eventually correct, no matter, the question is what can we do legally to cut pension costs. Any moral question about the impact on employees counting on this pension is decidedly secondary so off we go … get a consultant in here and let’s hear his ideas.

Ummm, when we add up the pension, the value of the 401k plan as an annuity and Social Security, the average worker starts retirement with 100% of their base pay. That’s no good; too generous. No matter that the employee funded 50% and likely more of the 401k which is no different than if he saved in a way having nothing to do with the employer. Same goes for Social Security, half is funded by the worker. And so what if the starting point is 100% of base pay, in a short time that will decline steadily and never stop doing so. And what about the executives whose years of bonuses and stock awards allowed them to accumulate value far in excess of 100% of base pay? No matter, we need to do something.

It’s a good thing federal laws prevent cutting a pension already accrued or some employers would be looking for a refund. On the other hand, simply underfunding a plan then terminating it and leaving workers at the mercy of the Pension Benefit Guarantee Corporation could result in cuts to pensions already in pay status. That’s a whole other story.

So, about this need to do something. Here’s an idea, we freeze the plan and start a new one next year except the new one uses an average of seven years earnings, not the five we now use … savings abound, permanent savings even when interest rates rise and the stock market is rolling again. But here’s the really cool part. When we communicate this, the primary message can be we just changed the average wages used from 5 to 7 years and we can downplay the really key part that we are starting all over again and then adding the two pieces of the pension together. 🙈🙉🙊

But hey, for years people have been projecting their pension and probably their retirement date. Won’t they notice something different? Oh they will notice. They will notice the pension they expected has dropped a few thousand dollars a year. They will notice they can’t afford to retire on the date they planned to retire. They will also notice their employer has a distinct lack of credibility and integrity. But the shareholders will be happy.

So can your expected pension disappear? You bet your bippy it can. All it takes is people who have priorities that ignore past commitments and what I, but not the lawyers, call “promises.” Bazinga! 😧

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