Tuesday, September 24, 2013

Cash Balance Symposium Monograph, Chapter 2

Cash Balance Symposium Monograph, Chapter 2 - Society of ...1 II The Emergence of Hybrid Pensions and Their Implications for Retirement Income Security in the 21st Century by Robert L. Clark and Sylvester J. Schieber 1. Introduction The conversion of large-company pension plans from traditional defined benefit (DB) plans to hybrid plans has been the focus of considerable debate during the past two years. During this time, we have examined various aspects of the hybrid pension phenomenon in a series of papers (Brown et al. 2000; Clark and Munzenmaier 2001; Clark and Schieber 2000; Clark, Haley, and Schieber 2001; and Clark and Schieber 2002a,b). Our purpose has been to investigate the reasons firms convert their pension plans, illustrate the impact of plan changes on expected pension benefits, and identify

the winners and losers when pensions are converted from traditional DB plans. In addition, we have analyzed some of the more controversial issues raised in the shift to hybrid plans, particularly those involving workers who face modified benefits under their new plans and the lack of further benefit accruals, known as the wear-away problem. In this paper, we summarize the results from our earlier papers and analyze the potential impact of plan conversions on retirement income security in the 21st century. The second section provides a brief discussion of the history and reasons for the shift to hybrid plans and the third section examines the underlying reasons for plan conversions. The fourth section evaluates the short- and long-term impact of the shift to hybrid plans on workers, and the fifth discusses the importance of communications in the transition. The sixth section assesses the need for further legislation to regulate the shift to hybrid pensions 2 while the final section discusses the future of retirement income security within the context of the hybrid pension controversy. 2. Background Hybrid pension plans are known by a variety of names, including cash balance plans, cash value plans, and pension equity plans; however, most can be sorted into two general types. The first type of plan, referred to here as a cash balance plan, defines a worker's "notional account" based on an annual contribution rate for each year of work plus an accumulating interest on the sum of annual contributions. The second type of hybrid pension, referred to here as a pension equity plan (PEP), defines the benefit as a percentage of final average earnings for each year of service under the plan. Both types of plans specify and communicate the benefit in lump-sum terms payable at termination, rather than as an annuity payable at retirement, which is typical for DB plans. 1 The first hybrid pension, a cash balance plan, was created by BankAmerica in 1985. Initially only a few companies copied this new form of pension. During the latter half of the 1990s, the pace of conversion to hybrid plans began to accelerate. By May 1999, a survey by Pensions and Investments reported that at least 325 plan sponsors had adopted a hybrid plan (Williamson, 1999). Extending this list by tracking reports of plan conversions in the media and annual reports, we estimate that around 500 firms have established hybrid pension plans to...

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