Cash-Balance Pension Plans: A Wolf In Sheep’s Clothing.

Across the country, the pension reform debates have spurred a lot of talk about how to fix the mess created by runaway defined benefits plans that promised more than they could deliver. So it’s no wonder that pension skeptics are suspicious about the latest scheme to emerge from traditional pension advocates, notably the labor groups and many in the actuarial community, who have proposed “cash balance” plans as the new panacea.

Rumor has it that a long-awaited back-room pension reform deal is expected to emerge next month from the Democrat-dominated California legislature and that it will include a cash-balance plan. So now seems a good time to explain the issues that should be aired before the legislators approve a bill — apparently without public hearing — in a last-minute fait accompli to beat the November ballot deadline.

How they work. For those unfamiliar with cash balance plans, they are sometimes known as “defined-benefit plans in drag.” Cash balance plans offer some of the features of both defined-contribution (DC) and defined-benefit (DB) plans. Participants are still guaranteed a minimum benefit and can collect a life annuity upon retirement — which provides more security from investment risks and longevity risks than a private-sector 401(k)-type individual DC account. In some plans, including public sector plans, there’s market upside for participants if investments perform better than the guaranteed floor rate. Each participant is credited annually with interest (accretion) on the employer and employee contributions, but instead of controlling an individual account and making their own investment decisions, that’s all done by the pension board. Small wonder that plan administrators, investment managers, consultants, actuaries and everybody who’s making a living from pension funds like this idea: They all enjoy job security with this plan.  Read the rest of this enlightening piece by Girard Miller for here.


Posted on May 14, 2012, in Compensation. Bookmark the permalink. Leave a comment.

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