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The demise of the private pension plan

Do you hear a faint, but ominous-sounding, bell? It's ringing the death knell for traditional pension plans.

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Some folks believe that these so-called "defined benefit" plans will all but disappear over the next 20 years. These plans pay a lifelong pension benefit that is determined by an employee's tenure and salary.

Many plans are in deep trouble. Companies are supposed to fund their pensions each year to cover the benefits they're promising, but many aren't funding them enough.

The shortfall for corporate plans totals more than $450 billion, according to the Pension Benefit Guaranty Corp., a quasi-government organization that takes over pension plans dumped on it by financially troubled companies. The PBGC recently announced that its exposure to financially weak companies -- those flirting with bankruptcy -- rose to $108 billion in fiscal year 2005, from $96 billion the previous year.

The PBGC guarantees that workers will get the pensions promised them -- to an extent. It will pay the promised amount up to about $45,000 a year for workers who retire at age 65. The cap is lower for younger retirees, higher for older ones.

Public pensions are also in bad shape. These are the pension plans promised to government employees -- firefighters, policemen, teachers, etc. Some 90 percent of public employees are promised a pension for life versus 20 percent of corporate employees. But public plans are also short of funds, by as much as $760 billion, according to Barclays Global Investors.

If nothing is done, who's ultimately going to bail out these public and private plans? If you answered "the taxpayers," you are right.

Congress in action
Over the past year, members of the House and Senate have been working hard on legislation that addresses private pension deficits in an attempt to avert such a taxpayer bailout. Their goal is to put a finalized bill on the president's desk for his signature before the end of the year. A chief concern is the PBGC's own deficit of nearly $23 billion -- the difference between its assets of $56.5 billion and liabilities of $79.2 billion. A bill that recently passed the Senate imposes strict time limits, generally seven years, for companies to eliminate their funding shortfalls. It also calls for an increase in annual premiums to the PBGC, from $19 to $30 per covered employee.

Does that strike you as a ridiculously low premium payment, considering the guarantee that companies are getting? For 2005 alone, the PBGC received roughly $1.5 billion in premiums from companies. Yet in that same time frame the agency took over the payments of 120 terminated company plans, which were only half-funded on average, involving 235,000 workers.

The extra 11 bucks per person that the agency may collect, if the bill becomes law, won't even come close to eradicating the agency's current deficit, let alone future liabilities.

But companies are not thrilled about paying the $30 annual premium because it will add to their pension fund burden. And that's another reason why we are closer to the demise of the corporate pension plan.

Next: Smoothing assets and obligations masks underlying volatility.
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