The aftereffects of the COVID-19 pandemic on retirement plans and Congress' recent failure to achieve multiemployer pension reform could mean a boost for variable pension plans, pension experts say.
The concept gained more visibility this year with a new variable annuity pension plan agreement between three major grocery companies and the United Food and Commercial Workers International Union, Washington.
And while congressional negotiations to reform multiemployer pension funds broke down in December, the incoming 117th Congress could revive the one area of bipartisan agreement allowing for composite plans that combine defined benefit and defined contribution features to share more investment risk with plan participants.
"After the dust settles on 2020, it will provide support for arguments we often make for defined benefit plans — the asset allocation and investment management advantages" that have historically averaged higher net returns than defined contribution plans, said Bruce Cadenhead, chairman of the American Academy of Actuaries' pension committee. He notes that some defined contribution plan participants were spooked enough by market volatility caused by the pandemic to withdraw some assets, missing out on gains realized by professionally managed defined benefit assets.
"I think we're seeing more variable plans than we ever have before, and more variations of them. ... They certainly come up in conversation," even among corporate plan sponsors, said Mr. Cadenhead, chief actuary for Mercer's global and U.S. wealth businesses in New York.
The basic premise of a variable defined benefit or variable annuity pension plan is that the plan adjusts benefits up or down based on investment returns. An assumed rate of return called the hurdle rate, typically between 4% and 6%, determines whether benefits for all participants, including retirees, go up or down on a plan year basis. Some variable plans have floors limiting how low benefits can dip if markets drop, and some build up reserves to augment benefit drops in those cases.
One approach is to add variable features to existing plans so that benefits change going forward, while in other cases, sponsors start a new variable plan and freeze the existing legacy defined benefit plan.
For employers with unionized employees whose international or even local unions are often the ones raising the variable plan idea or companies that want to get out of a multiemployer pension fund for a variety of reasons, "it seems that variable annuity plans have become a popular compromise," Mr. Cadenhead said.
While the concept is more prevalent among multiemployer pension funds, "we have seen some activity from the single-employer side in establishing variable plans," said Robert Kurak, vice president and consulting actuary with Segal Consulting in Minneapolis. Segal actuaries implemented several over the summer and fall and continue to see interest, he said.
"We also continue to see a mix of adding a variable feature for future service to an existing plan, and some clients are interested in starting a brand-new plan," Mr. Kurak said.
In the corporate world, it is harder to overcome the momentum toward defined contribution, and variable plans are more complicated to administer, "but the big advantage is that the overall financial risk is reduced," so it often becomes a matter of what employers want for their employees, Mr. Cadenhead said.