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March 07, 2005

Actuaries Suggest Reforms to Strengthen Defined-Benefit Pensions

In an effort to help strengthen the nation's defined-benefit pension system to ensure retirement security for all workers and retirees, the American Academy of Actuaries has released an issue analysis detailing major steps for pension funding reform for single-employer plans. The analysis was delivered to key lawmakers on Capitol Hill during meetings held this week. "Employers, employees, the markets, and the nation will benefit by a stronger defined-benefit system," said Ron Gebhardtsbauer, the Academy's senior pension fellow.

Pension plans have been troubled for a number of years by a combination of low-interest rates and large declines in equity, which have resulted in increased liabilities and decreased asset values simultaneously. The total underfunding in private, defined benefit pension plans is an estimated $450 billion, according to the U.S. Department of Labor. Stakeholders, such as pension plan participants, employers, shareholders, and the Pension Benefit Guaranty Corporation (PBGC), have advocated that the pension funding rules be reformed. The current funding rules are overly complex and lack transparency, which has weakened the defined benefit system just as a large number of America's population is planning to retire.

This analysis addresses funding rule reform by presenting seven "Fundamental Principles for Guiding Pension Reform," developed by the Academy's Pension Practice Council and Pension Committee. Using these principles as guideposts for reform will strengthen the defined-benefit system.

The principles include: 1) Solvency; 2) Predictability and Hedgeability; 3) Transparency; 4) Incentives to fund and flexibility; 5) Avoidance of moral hazards; 6) Simplicity, and 7) Transition.

The Academy analysis addresses both incremental and comprehensive reform. "Whether reform is comprehensive or incremental, following these principles will result in creating a viable, sustainable retirement system," stated Kenneth A. Kent, vice president of the Pension Practice Council. The paper includes specific legislative changes that should be considered by Congress. The Academy encourages the development of new funding rules that will help employers maintain their defined-benefit pension plans, increase the number of employees protected by the income guarantee provided by defined-benefit pension plans, improve pension plans' funding levels, and reduce the risks and costs to the PBGC and participants.

To view the analysis, go to
http://www.actuary.org/pdf/pension/funding_issuebrief_05.pdf.

The American Academy of Actuaries is the nonpartisan public policy organization for the U.S. actuarial profession. The Academy provides independent analysis to elected officials and regulators, maintains professional standards for all actuaries, and communicates the value of actuarial work to the media and public.

Posted by Tom Troceen