A new type of defined benefit pension plan is gaining some traction in both the public and private sectors that could reverse the trend of companies and governments dumping their defined benefit plans in favor of defined contribution plans.
The adjustable pension plan is the brain child of executives at Cheiron Inc., an actuarial and financial consultancy with offices across the country. The idea is to merge some of the best features of a traditional defined benefit plan with features from the defined contribution plan market to get a hybrid that provides employees with a lifetime income stream. The big upside is that the employer and the employees split the investment risk between them so neither side shoulders all of it.
The adjustable pension plan looks at investment risk, maturity risk, mortality risk and inflation risk when determining the costs.
To offset the investment risk, it is shared between the employers and employees. The adjustable component is tied to the overall performance of the pension plan, Hudson said.
The New York Times plan was priced when interest rates were the lowest they had been in years. The “expectation is that if interest rates return to normal, employees will get an increase in their retirement benefits. Because the multiplier for the plan was 1.2 to start off with, that was above what the average employee at the New York Times was getting under the old plan anyway. If rates go up, the multiplier will go up. It will automatically go up. There is no manipulation by the employer or the union,” he said.
The New York Times plan covers about 1,000 workers. If the IRS doesn’t give its seal of approval by July 31 when the company’s Form 5500 is due, the New York Times plan will convert to a defined contribution trust instead. The IRS must make its decision by then for those employees to be able to keep this benefit.
The taskforce submitted its recommendation to move the retirement system to an adjustable pension plan to the state legislature early in 2012, but the legislature has not held a hearing or acted upon it yet.
“It’s just part of the process. We’re kind of in the queue,” Matheson said. The taskforce had hoped to implement the adjustable plan for new state employees and teachers beginning in June 2015, but that date could be adjusted depending on when the legislature gives its approval.