Sunday, September 18, 2005

“Short” Comings?

As the recent bankruptcies of Delta and Northwest Airlines remind us, pensions are a precarious business. Once again, we - and most particularly, the employees of those airlines - are presented with the stark reality that pension promises made in better times are frequently no more secure than the financial wherewithal of the institution that, once upon a time, made them. One can certainly have some sympathy for the individuals who have made an employment commitment predicated on those promises, most particularly for those who have already entered retirement.

The signs of danger are all around us, and not just in private industry. By now, we are all well aware of the “perfect” storm’s combination of slumping asset values, the burgeoning pension obligations of early and accelerated retirements, and the exaggerated impact of historically low interest rates that result in even higher projected pension liabilities. We are frequently reminded of the “sorry” state of pension funding in this country – which is to say, anything less than an ability to come up with 90% of the total projected pension liabilities on a moment’s notice (that’s the kind of math that bankers like). Little wonder that there is a growing hue and cry to shore up those funding gaps – and they deserve attention, IMHO, though too often the headlines convey a sense of imminent demise when the perceived shortfall is largely a function of projections based on estimates predicated on assumptions that may never come to pass. Still, as some have all too regularly evidenced, today’s underfunded pension can be tomorrow’s Pension Benefit Guaranty Corporation (PBGC) obligation.

Pensions, of course, aren’t predicated on worker retirement lifestyle aspirations, they are generally a function of pre-retirement pay. We don’t ask pensioners how they would like their funds invested, nor do we consult with them on the timing of asset allocation rebalancing. Rather, it is done for them, generally with the assistance of experts. Those enamored of this approach point to automatic enrollment, contribution acceleration, and lifestyle funds as the “DB-ification” of defined contribution plans – the purported wisdom of bringing to bear on the DC side the approach that has long been true on the defined benefit side.

I don’t much care for the “DB-ification” analogy, if for no other reason than it tends to gloss over the reality that, with DB plans, we also didn’t ask workers to make direct monetary contributions. There may be something to draw from that comparison, but I’m not sure it has anything to do with doing things “for” participants. On the defined contribution side, we tend to worry about the disappointing rates of participation, the tepid rates of deferral, and the inattentiveness to prudent asset allocation – and most of the recent focus has been concentrated on ways to remedy these shortcomings. At some level, we all know that those elements are important because in combination they will eventually add up to a retirement nest egg.

But the DB-ification focus that workers need to adopt, IMHO, is a working awareness of just how underfunded their personal pension account is. Would that most were “only” 70% funded - the level at which many pension fund officials are pilloried - because I suspect that most defined contribution-reliant retirements are more like 30% funded, or even less. We’re well past the time when we should be aware of those personal funding “gaps.” We may well worry about the long-term financial viability of the PBGC and all these troubled airline pension plans. But who will pick up the shortfalls of all those failed personal pension plans?

I think we all know the answer to that.

- Nevin Adams

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