Employers will offer defined benefit pensions if they’re lightly regulated, putting employees and taxpayers at risk. If pensions are well-regulated, employers won’t.
One distinction between multiemployer/church/state-and-locals vs. single-employer private sector is that the former generally bases liabilities and resulting funding on expected-return discounting and the latter doesn't. That means liabilities are understated and contributions are lower, but I'd distinguish that from "costs" -- costs are what they are even when the actuary understates them.
Stricter vesting requirements add cost, and PBGC premiums are a real cost, as you note, that apply only to the latter. I haven't looked, but I'd be surprised if vesting differences are significant between the former and the latter these days.
Maybe a minor point, but my sense (from experience) is that, at least in the last few decades, GAAP accounting requirements and PBGC premiums probably have more to do with improved funding in private-sector single employer plans than ERISA funding requirements. There is effectively a tax (PBGC variable rate premium) of 5.2% of underfunding per year. That's a big incentive to fully fund.
And especially for publicly traded companies, accounting is a big deal. Retiree medical plans started disappearing almost immediately when corporations were required to include them on their books starting in 1993, and there are no ERISA funding rules or PBGC coverage for them. They disappeared faster than the pensions (probably because they were unfunded - no run-off)
I would argue that "well-regulated" made them very expensive. Their heavy dependence on interest rates made them volatile, and the shift in accounting rules made that volatility (and expense) intolerable on the corporate financials. And the reality that most simply faded into non-existence without protest in the private sector proved that there was little value to compensate for the risk.
Great article Andrew!
Nice article - thanks.
For what it's worth, a couple of thoughts.
One distinction between multiemployer/church/state-and-locals vs. single-employer private sector is that the former generally bases liabilities and resulting funding on expected-return discounting and the latter doesn't. That means liabilities are understated and contributions are lower, but I'd distinguish that from "costs" -- costs are what they are even when the actuary understates them.
Stricter vesting requirements add cost, and PBGC premiums are a real cost, as you note, that apply only to the latter. I haven't looked, but I'd be surprised if vesting differences are significant between the former and the latter these days.
Maybe a minor point, but my sense (from experience) is that, at least in the last few decades, GAAP accounting requirements and PBGC premiums probably have more to do with improved funding in private-sector single employer plans than ERISA funding requirements. There is effectively a tax (PBGC variable rate premium) of 5.2% of underfunding per year. That's a big incentive to fully fund.
And especially for publicly traded companies, accounting is a big deal. Retiree medical plans started disappearing almost immediately when corporations were required to include them on their books starting in 1993, and there are no ERISA funding rules or PBGC coverage for them. They disappeared faster than the pensions (probably because they were unfunded - no run-off)
Thanks again -- good stuff.
I would argue that "well-regulated" made them very expensive. Their heavy dependence on interest rates made them volatile, and the shift in accounting rules made that volatility (and expense) intolerable on the corporate financials. And the reality that most simply faded into non-existence without protest in the private sector proved that there was little value to compensate for the risk.
Very well explained.