Lady Barbara Judge, CW’66, recalled the time she was recruited to join a British firm in Hong Kong and, to sweeten her compensation package, the prospective employer offered a pension. Judge took the job but, in her late 30s at the time, declined the pension and took the money up front. A mistake, she admitted now, as she looks on at people with defined-benefits plans as “lucky.”
“But that situation is in danger,” she said. And she should know, as chairman emeritus of the U.K. Pension Protection Fund (PPF).
Judge came to Wharton, along with her U.S. counterpart—Joshua Gotbaum, director of the Pension Benefit Guaranty Corp.—to speak at a special forum hosted by Wharton’s Pension Research Council. The topic: the weakness of pension systems and potential ways to save them.
As Judge and Gotbaum explained, it appears that one way to “save pensions” is to undergird existing programs, while waiting for the traditional pension to disappear.
The Pension Protection Fund oversees $18 billion in assets that represent 6,500 U.K. pension programs involving 12 million individuals. Its goal is to become self-sufficient by 2030—meaning it won’t have to take assessments from active private pension plans—but that projection is based on the notion that by 2030 all pensions will be closed to new participants and the PPF will know exactly how many people to whom it must continue to pay benefits.
Lady Barbara Judge, CW’66
The picture in the United States is perhaps not as clear. Gotbaum stressed that the pension system is not already dead or frozen, as perhaps one people might believe from reading media headlines. About 75 million Americans still enjoy defined-benefit plans, 36 million of whom are still active in the workforce. In private pension plans, 82 percent of participants are still accruing benefits. Only 10 percent of U.S. private plans are “hard frozen” and no longer taking new participants, while 8 percent are partially frozen, according to Gotbaum.
“The Ice Age hasn’t happened yet,” he said.
What is happening, Gotbaum suggested, is that many U.S. employers are looking for ways to combine the benefits of defined-benefit and defined-contributions plans into hybrid retirement benefit solutions. Options such as cash balance plans, pension equity plans, floor offset plans and DC auto escalation plans already exist. It is up to regulators to make it easier for employers, large and small, to set up such benefits for their workers, steps in part that the U.S. government is working toward.
Otherwise, we could all be looking at nest eggs that are cracked and cooked well before our retirements are over.
The Pension Research Council (PRC) of the Wharton School of the University of Pennsylvania is committed to generating debate on key policy issues affecting pensions and other employee benefits. The “Saving Pensions” panel, which took place on May 2, was moderated by PRC Executive Director and International Foundation of Employee Benefit Plans Professor Olivia S. Mitchell.
