The pension pendulum likely will swing back toward defined benefit plans within the first few decades of the new millennium, observers predict.
"Self-determination and defined contribution won't be adequate. People will return to a more secure system," said William F. Quinn, president of AMR Investment Services Inc., Dallas-Fort Worth, Texas, which oversees the $5.6 billion defined benefit plan and $6.6 billion in defined contribution assets for American Airlines Inc.
But that shift won't be at the exclusion of defined contribution plans, said Rich Koski, a director with Buck Consultants Inc., Secaucus, N.J. He predicts retirement programs will be part of a total flexible compensation package, a movement now in its infancy.
As competition for employees gets even keener, "benefit plans will have to be much more competitive. People will focus more on benefits when selecting an employer," said Jerry Van Schaick, president and chief executive officer of Lockheed Martin Investment Management Co., which manages the $23 billion defined benefit plan for Lockheed Martin Corp., Bethesda, Md.
Defined contribution plans have enjoyed popularity because of the remarkable bull market of the past eight years, said W. Allen Reed, president of New York-based GMIMCo, which manages more than $100 billion in pension and insurance assets, including the $80 billion defined benefit plan for General Motors Corp. and the $16.6 billion 401(k) plan for salaried employees.
"If we go through a rough period where people lose 30% to 40% of assets," he said, employees will take another, more favorable look at defined benefit plans.
"I don't think defined benefit is dead," said Geoffrey Norman, executive vice president with GE Investments, the master trustee of the $45 billion defined benefit plan of General Electric Co. in Stamford, Conn. But, "the organic growth of defined benefit has been low, while defined contribution's been high."
The true test for defined contribution plans will come when the baby boomer generation begins to retire, he said. There are "not many people retiring into (defined contribution) assets because it's relatively new," he said.
Another test for defined contribution plans will be the continued strength of global equity markets, particularly the U.S. market. "If the market goes up 15% per year, defined contribution is fantastic," said GMIMCo's Mr. Reed.
Portability and choice
Two of the major issues confronting pension funds over the coming decades will be portability and choice, pension executives said.
"Plans will be much more portable than today," said Lockheed Martin's Mr. Van Schaick.
Currently, workers face high costs when they leave their companies, he said. In the future, portable plans will allow employees to "pick up and move with smaller penalties."
"People working for the same corporation for 30 years is a thing of the past," he said.
Hence, corporate pension plans will be pushed to accommodate employees and make "homogeneous" plans.
That is already happening "today in some cash balance plans," he said.
It is difficult to guess the potential size of Lockheed Martin's retirement plan's future assets, Mr. Van Schaick said.
A big factor, however, will be the number of employees. "Any large manufacturing corporation could see its work force reduced by one-third" in 50 years, he said, because of outsourcing, automated manufacturing, global competition and a "driving need for greater efficiencies."
Lockheed Martin has 165,000 employees, he said.
Executives agreed pension fund portfolios will become increasingly global. Borders between some asset allocations will be erased, they said.
There will be "no talk about international or emerging markets, just equities," said Mr. Quinn of AMR.
Three global trading blocks -- the Americas, Europe and Asia -- will take shape, he said.
And some industries such as pharmaceuticals and car making "will consolidate to a few global players," GMIMCo's Mr. Reed said.
Computers might run on artificial intelligence and electronically sift stocks, making analysts obsolete. Pension fund executives might allocate assets around the globe to geographic equity blocks rather than differentiating between developed and emerging markets.
And Social Security -- in some form -- most likely still will play an important role. "A generation and a half out, will Social Security be replaced by a government-mandated pension plan?" asked Buck Consultant's Mr. Koski. "In the corporate world, people would be pushing" to give mandated benefits in lieu of making Social Security payments.
"DB, DC, Social Security, it's a three-legged stool," Mr. Reed said. "It's a model that's worked well over the past 25 years. It will work well in the future."
With all of the changes ahead, U.S. pension funds could total almost $4 quadrilion in assets by 2050.
Or $654 trillion.
Or they might reach a mere $100 trillion.
That's if U.S. pension funds, which last year hit $8.8 trillion, see, respectively, compounded returns of 13%, 9% or 5% in the next 50 years.
Predicting 10% annual growth of assets is not unreasonable, said pension fund executives. But fees and benefit payments will eat into total returns.
"Ten percent doesn't include payments," Mr. Norman said. "Five percent is a better number. Over 50 years, that would turn a $45 billion plan into half a trillion dollars."
Over the past five years, U.S. pension funds have grown at a compounded rate of close to 9%.
If that rate continues in the next half century, a $100 million fund would total $7.4 billion; a $1 billion fund would total $74 billion.
And 50 years ago, U.S. pension fund assets totaled $14.2 billion. Since then, they have grown at a compounded annual rate of 13.6%.