Some of the most competitive major companies have strong, viable defined benefit plans:
• Boeing Co. announced last month that its defined benefit plans are fully funded.
• Exxon Mobil Corp. this month contributed $2.4 billion to erase the deficit in its defined benefit plans, bringing them to full funding.
• The BP PLC plans are 26% overfunded.
• General Electric Co.'s plan also is overfunded.
• Deere & Co.'s $8.97 billion plan is $176 million overfunded as of Oct. 31.
In fact, the typical U.S. pension plan's funded status improved by 2.4 percentage points last month, according to the Mellon Pension Liability Index.
These recent reports give credence to a finding of a survey of pension experts on the future of defined benefit pension plans, jointly sponsored by Pensions & Investments and Oxford University. A majority of experts surveyed believe there will still be private-sector defined benefit plans open to new members in 20 years. That is one encouraging and unexpected finding.
But the encouraging experience of some large companies belies the troubling outlook found in the survey on the expectation of a more general decline in the marketplace. How many plans will be left?
Defined benefit plans are seen by respondents as an obstacle to corporate competitiveness. That is one reason companies have been jettisoning them. A majority of survey participants believe the current structure of DB plans is not sustainable to fund promised benefits.
The private defined benefit system's structure will have to change radically to survive, survey respondents indicated. Corporations will not continue to sponsor DB plans unless the pension deal is restructured.
The respondents agreed with the statement: "Increased market competition has weakened the competitive position of private DB plan sponsors with large pension liabilities," write Gordon L. Clark and Ashby H. B. Monk in their analysis of the survey. "As such, going forward pension plan design will have to consider the competitive position of the plan sponsor in order to achieve sustainability,"
General Motors Corp and Ford Motor Co. are examples of defined benefit plan sponsors whose competitive position has been weakened, at least in part, by their huge legacy pension costs.
But the problem also affects stronger, more competitive companies. International Business Machines Corp., for example, under competitive pressure and confronted by the unwillingness of regulators to sanction conversion of its defined benefit plan into a cash balance plan — which the company believes is more sustainable — gave up and decided to terminate its defined benefit plans, even though they were fully funded. Many of its key competitors have never had the financial burden of a defined benefit plan.
Current trends, and the findings of the survey, suggest the pension deal will have to be changed to an implicit promise allowing for corporate contingencies, from an explicit guarantee which allows none except perhaps bankruptcy. A conclusion based on the survey noted: "Long-term contracts are highly prone to inefficiencies and inflexibilities. Indeed, writing a long-term contract that takes into consideration all possible future outcomes is impossible."
Participants will have to share more responsibility. Some views of the experts surveyed coincide with views of Canadian pension expert Keith P. Ambachtsheer, who advocates risk-sharing among stakeholders to ensure the sustainability of defined benefit plans.
Reformers shouldn't look to government to shoulder more of the financial burden, but they should expect government to permit more flexibility in regulations to encourage more experimentation and innovation, seeking designs to help make plans less vulnerable to market volatility and competitive pressure.
Yet given the difficulty in pushing through the reforms that culminated in the Pension Protection Act last year, the outlook for the needed changes being made soon seems poor.
Those who wish to preserve defined benefit plans ought to get together, negotiate changes to the system to preserve it, and then start lobbying Congress for more flexibility in pension regulations to take into account competitive dynamics and contingencies.
