U.S. corporate defined benefit plans have been closing and freezing benefit accruals for decades, with a number of industry experts pointing to the very regulations meant to protect them as a top contributing factor.
But the flood of cheap money unleashed by central banks' quantitative easing efforts to combat the global financial crisis has only added to the pressures that corporate, as well as public, plan sponsors face, experts said.
Quantitative easing has “exploded the value of liabilities,” said Gordon Clark, director and professor at University of Oxford Smith School of Enterprise and the Environment.
“It is the realization really, what it is, five years, six years of quantitative easing have made the affordability of defined benefit plans almost around the world actually fundamentally at risk,” Mr. Clark said.
According to data from the Washington-based Employee Benefit Research Institute, 28% of all U.S. private-sector workers had a defined benefit plan in 1979, while 10% had a combination of a defined benefit and defined contribution plan.
By 2013, the percentage of U.S. private-sector workers who were covered only by a defined benefit plan fell to 2%, while 11% were covered by both a DB and DC plan. Thirty-three percent were covered only by a DC plan.
The decline in participation in DB plans hasn't been a surprise. Ten years ago, Pensions & Investments partnered with Oxford University to survey 1,605 global pension experts about the fate of DB plans. A little more than half of the respondents agreed that open private-sector DB plans would continue to exist by 2027.
Even before that survey was conducted, corporations had been closing and then freezing the benefit accruals in their DB plans. Since the survey, that activity has accelerated and a number of large plans have even transferred their assets and liabilities to third parties.
To be sure, DB plans, both public and private in the U.S., continue to hold the dominant share of plan assets, with the P&I 1,000 survey of top U.S. retirement plans finding that DB assets of the 200-largest plans accounted for 71% of total plan assets of $6.792 trillion, compared with 29% in DC plans.
In place of a traditional DB plan, private-sector employers have adopted defined contribution plans that shift the risk to participants. Some sponsors also are incorporating some of the best features of defined benefit plans into their DC plans.