Retirement Security: Overcoming the Legacy Costs of Private Pension Plans
June 29, 2010
New York
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| Bradley Belt, left, discusses the growing pension crisis, based on his expertise as chairman of Palisades Capital Advisors and as former executive director of the federally chartered Pension Benefit Guaranty Corp. |
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As the baby boomers near retirement, a growing pension crisis threatens many workers' chances of receiving the benefits they were promised by their employers. Moreover, underfunded pension liabilities also threaten the valuations of a growing number of public corporations at a time when they are facing other capital constraints.
In 2009, some 350 firms in the S&P 500 with defined benefit (DB) plans faced a funding deficit of $263 billion. The recent market downturn has sharply worsened underfunding; these companies' plans slid from being 94 percent funded in 2007 to being only 80 percent funded in 2009. Business-as-usual investment strategies are being challenged, and there is an increased risk of exposure for the Pension Benefit Guaranty Corporation (PBGC).
The Milken Institute, along with the United Food and Commercial Workers (UFCW), convened a Financial Innovations Lab to explore strategies for overcoming the spiraling unfunded legacy costs of private DB plans for current and retired employees. The UFCW's David Blitzstein discussed alternative private pension plans, but pointed out that sponsoring companies will not be able to move toward a more sustainable future plan without resolving the existing unfunded liabilities.
The restructuring and settlement process of the DB system's unfunded legacy costs requires involvement from all stakeholders: plan sponsors, companies, participants, unions, the PBGC and the government. Bradley Belt, chairman of Palisades Capital Management and former executive director of the PBGC, discussed the impacts on all stakeholders, constraints of current laws and regulations, and the limitation on PBGC's ability to act (currently, the PBGC cannot negotiate/establish a revised contribution schedule with ongoing plans, though it can set the terms of repayment for a terminated plan).
A possible solution presented by economist Jeremy Gold includes a one-time move to full funding utilizing a bond swap between plan sponsors and PBGC. Participants noted that introducing PBGC bonds into capital markets would increase transparency both at plan levels and at PBGC.
Lab participants agreed that a one-size-fits-all approach simply won't work. They concluded that existing plans need to be tested and then separated into three groups:
1) The marching ahead: Unfunded liabilities for this group can be resolved using the strategy proposed by Jeremy Gold, or a similar mechanism.
2) The walking wounded: The solution for this group is to give PBGC negotiation authority, change the plan structure and share the costs of restructuring among stakeholders.
3) The walking dead: The unavoidable solution for highly distressed plans is for the PBGC to work out and refinance. Participants discussed how the sharing of the cost burden could be termed out with federal support on a basis that would isolate these liabilities and mitigate further losses.
Emily K. Kessler, senior fellow at the Society of Actuaries (SOA), suggested financing unfunded liabilities through industry-specific taxes. Karyn Williams, managing director at Wilshire Associates, called for more focused capital market solutions. The competitive annuity markets, private insurance, liability-driven investing strategies, dynamic portfolio management enabling duration matching, and macroeconomic aspects were also discussed.
To read the results of the Lab, including recommended next steps for implementation, view the full report. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at cmaclean@milkeninstitute.org.
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