NECA TransmissionsNotes from the front lines of the electrical contracting industry

Pension Conundrum

Posted on Nov 04, 2008 by John M Grau

My last post generated some questions. What else can local areas do to lessen or eliminate pension liabilities, besides wait for the government to act? Why not shut down the defined benefit (db) plan or convert to a defined contribution plan?

Terminating a db plan and replacing it with a 401(k) plan seems to be a simple solution. The problem is that the old db plan liability doesn’t go away. If a plan is unfunded, the gap will have to be made up before any insurer will take over the plan or convert the pensions to annuities. Instead of spreading the liability over many years, you are converting it to an amount due today. That’s not much help.

Freezing a plan — halting future benefits — reduces the future liability, but any past unfunded amounts still have to be paid. It’s a viable long-range option, but it doesn’t provide immediate relief.

This all presumes that the union members will agree to convert their pensions. A few years ago, it was an easier sell. In the late 1990s, many people felt they could do a better job investing their money on their own. They preferred quarterly 401(k) statements showing a tangible value to their growing nest egg, versus some complicated formula for long-range pension benefits.

Today, instead of a growing balance, most 401(k) participants have seen their nest egg shrink by 30% or more. All of a sudden, being responsible for their own investments doesn’t seem so attractive anymore.

The conundrum: Why would any employer want to continue to provide a defined benefit pension plan? Why would any employee want a 401(k) plan in lieu of a db plan?

One reason unions might want to help solve this problem involves their future survival and growth. One way for an employer to shed his liability is to go out of business. If enough employers choose that route, union jobs will be lost as well. Also, consider how difficult it will be to convince a non-union employer to sign up when you offer him the prospect of helping to payoff an unfunded pension liability.

Most employers I talk to aren’t against paying towards a retirement plan for their employees. But they also want assurances that whatever contribution they make is the sum total of their obligation. The long-term solution to the pension conundrum will have to include this provision.

In the short run, we’ll have to bank on government action to relieve any immediate shortfall liability. In the long run, we have to come to grips with the pension conundrum.

About NECA Transmissions

NECA Transmissions is a collaborative effort from CEO John Grau and NECA staff to provide insight and feedback on key issues from the front lines of the electrical contracting industry.


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