Editor’s Note: The following quick summary of the Re-Imagining Pension symposium was prepared by an actuary in attendance.
On Feb. 22, 2012, Covington & Burling, LLP, the Urban Institute, and the Pension Rights Center cosponsored Re-Imagining Pensions: Using Innovative Pension Plan Design to Reduce Risk and Increase Retirement Income. The conference was divided into three main panels with a final summary and next steps discussion.
The first panel covered pension designs to share and reduce risk. The designs presented included the following:
- POPP (Plain Old Pension Plan) was presented by Judy Mazo, retired from the Segal Company, and was originally presented in Conversations in Coverage in 2003-4.
- Adjustable Pension Plan was presented by Rich Hudson of Cheiron. This plan is essentially a variable annuity DB plan with a floor benefit as adopted by the UFCW union.
- Portfolio Cash Balance Plan was presented by Robert Newman of Covington & Burling and is a cash balance plan with interest credits based on the return on an individually appropriate portfolio of investments.
- Retirement Security Funds was presented by Karen Ferguson of the Pension Rights Center. This design idea is a collective DC plan modeled after the Dutch system which would be run by financial services firms. Employers commit to a fixed contribution which is matched by employees (a “reverse match”) and benefits are adjusted by the fund based on actual investment experience.
The second panel covered pension designs to increase coverage and adequacy. The designs presented included the following:
- Secure Choice Pension was presented by Hank Kim of NCPERS. This idea was originally presented in September 2011 and is the subject of a white paper. The concept is a public sector state plan with a segment covering private sector small business employers willing to participate.
- Super Simple Plan was presented by Pamela Perun, a retirement income policy consultant. This is a design she originally presented in May 2008 (white paper) . It is a DC plan that employers may voluntarily adopt with no nondiscrimination testing and no limits on HCE deferrals, but all employees must receive a uniform contribution.The third panel covered pension designs to expand lifetime income options. The designs presented included the following:
- Social Security as a Source of Annuities was presented by Eugene Steuerle of the Urban Institute. His ideas are to essentially make changes to the Social Security System to allow and encourage partial distributions, encourage deferral of Social Security benefit commencement, simplify the earnings test, and allow the purchase of additional benefits so that retirees have more options for structuring their retirement income.
- Income Plus Plan was presented by Jeffrey Maggioncalda of Financial Engines. He explained their approach for structuring an individual’s defined contribution account balance payout streams to provide income over retirement. Their broad approach is to commit 65 percent of the portfolio to fixed income for base payouts to age 85, set aside 15 percent for longevity insurance at age 85 and use the remaining 20 percent for a growth portfolio to provide cost of living increases through retirement.
Additional summaries of the designs can be found on the event website.
Commentary & Observations
The focus of the discussion was ideas to expand pension benefit options in the voluntary, private-sector pension system. While the ideas were generally ones that have already been discussed in the past, this session was unique in that advocates for employees, employers, unions, and the government worked together to pursue new types of pension designs.
The presentations of the panelists made it evident to me that the design and delivery of retirement benefits in the future may include a number of different approaches. Workers changing jobs may collect a mix of account-based benefits, fixed annuities at traditional early/normal retirement ages, and longevity annuities deferred to later ages. The Income Plus Plan presented by Financial Engines seemed to recognize this trend and attempts to create a process to build an individualized plan for financial security during retirement from the available pieces.
Workers under the traditional three-legged-stool approach historically focused on saving what they could during their employment years with the expectation that Social Security and employer-provided pensions benefits were designed to provide a basic level of retirement security as they approached their retirement years (and earlier, as well, in the event of their death or disability). Under a more flexible approach to benefits in the future, workers will need to constantly monitor and adjust their benefit plan participation (particularly at the time of job changes) to ensure that their death, and disability benefit needs all continue to be met and that their retirement savings is on target. However, it is unlikely that employees will have the time or talent to effectively handle these difficult financial planning tasks without significant help. Unless the government and/or employers provide a mechanism for workers to obtain the needed assistance, many workers, including the lowest paid who most need the help, will go without it. Thus, even if employers shift most of the financial responsibility for retirement savings to their workers, the nation needs employers to continue to provide guidance and assistance to their workers in planning for their benefit needs.
The government can also help workers by facilitating a retirement system in which workers can shift their retirement savings among the available approaches to the one that best meets their individual needs. The government recently provided guidance to facilitate annuities and longevity insurance in DC plans. However, additional flexibility was not added to DB plans. A worker with a small frozen DB plan benefit may find it more advantageous to convert that small annuity benefit into a larger, longevity annuity. Employers may also find it attractive to provide DB benefit accruals payable at age 85, rather than at age 65, if such an alternative was legally viable. It was encouraging that government representatives at the session understand that our pension system must be changed to allow more flexibility or none of these new plan designs will ever be able to be adopted.