Double DB® Model Offers New Funding Choice for Pension Plan Sponsors
Boca Raton, FL –US Newswire– Across the country since 1980, private firms have nearly eliminated defined benefit (guaranteed) pensions in favor of 401(k) savings accounts as employers have been troubled by the runaway cost of pensions that require them to finance the losses in their pension funds due to market turmoil. According to the National Institute on Retirement Security,less than 15 percent of private sector employees still have a defined benefit (DB) pension; and pressure is building for state and municipal governments to follow suit.
But these 401(k) type defined contribution (DC) systems have begun to reveal cracks that put employees at risk. Perhaps most troubling is “leakage,” the clear trend of individuals borrowing from their retirement accounts to cover current expenses without repaying the withdrawals. Too many seniors are at risk of exhausting their savings and taxpayers will need to care for them as they age.
Moreover, these DC accounts are individually managed and are a poor substitute for group funded pension plans, because of the absence of investment expertise by individuals, the absence of a shared cost of disability and survivorship benefits, lack of annuitization at retirement, and the heavy expense of maintaining the individual accounts.
The patent-pending Double DB® Pension model has been developed as an answer to the problem. It satisfies the clamor for state and municipal government to embrace “fixed cost” pension funding while at the same time overcoming all the weaknesses of individual account systems. In due course it is anticipated that even private firms will choose to replace their 401(k) plans with a Double DB® model.
The Double DB® Pension model divides the existing traditional DB pension plan into a two-tier system based on the existing actuarial assumptions and funding method. Each of the two tiers – the Base DB Plan and the Double DB® Partner –initially receives half of the employer and employee assigned contributions. Each is initially responsible for providing half of the benefits of the original plan to retirees. All assets are invested together.
Assuming in any given year of operation the returns on investments are lower than anticipated, the assigned contribution sharing of the two plans protects the actuarial funding requirements of the Base DB Plan while the Double DB® Partner receives less. In the following year, a retiree will receive part of his benefit (a full half of the promised benefit) from the Base DB plan, and part coming from the Double DB® Partner that would be slightly reduced. If returns are higher than anticipated, the reverse occurs.
In the year following higher than anticipated investment returns, the Double DB® Partner having received more than the Base DB Plan, a retiree will receive half his pre-determined benefit from the Base DB plan, while the half coming from the Double DB® Partner would be slightly increased. The fixed cost characteristic of the Double DB Pension model prevents the plan sponsor from reduced funding or funding holidays, because the pension plan must be fully funded each year, a “good times” insulator against “bad times” ballooning unfunded liabilities.
Public pension plan sponsors know that retirement benefits are a critical source of recruitment and retention. Most public plan sponsors wish to keep defined benefit plans in place, but they are seeking creative new ways to conform to today’s financial realities while protecting both taxpayers and employees. The Double DB® Pension model provides that opportunity.
Mr. Edward H. Friend (FSA, FCA, MAAA, EA, AIA), author of Double DB®, has served as lead actuary to hundreds of public agencies and public retirement systems of all sizes, including CalPERS, the largest public retirement system in the United States. He has served as: President, Conference of Actuaries in Public Practice; Vice-President, American Academy of Actuaries; Member, Board of Governors of the Society of Actuaries; and contributing author/founding member, International Association of Consulting Actuaries.