Pension Crisis Nears Disaster Levels

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As Congress debates potential solutions, underfunded public and corporate pension plans threaten to disrupt the lives of millions of Americans, notes Cowden Associates.

Elliot Dinkin, President and CEO of Cowden Associates, discusses the impact of underfunded pension plans.

A little-noticed provision in the recent government spending agreement created a select congressional committee to craft what could effectively be a federal rescue of as many as 200 multiemployer pension plans. Most of these plans are teetering on the brink of insolvency, as benefits owed to workers vastly exceed the plans’ ability to pay.1 “This is welcome news, but government action alone can’t solve this,” said Cowden Associates President and CEO Elliot Dinkin, a nationally known expert in actuarial, compensation plans, and employee benefits issues. “Underfunded and frozen pension plans are jeopardizing the lives of millions of employees, current and future.”

The situation with public employee pension plans—those designed to pay future retirement benefits to government workers such as firefighters, policemen and teachers—has been widely described as a disaster waiting to happen. The money for these funds comes from two sources: taxpayers, and investment growth. Most developed nations, including the UK, Canada, the Netherlands, Sweden and France, assume a conservative return on pension investment, approximately that of government bonds. Overall, these plans are very well-funded.2 In the U.S., however, funds assume an average return of 7.6%, substantially above current actual results—one reason some experts believe that U.S. state and local government pensions could be underfunded by as much as $5 trillion.3

Unfortunately, pension problems are by no means limited to the public sector. A recent study shows that 186 of the 200 largest defined-benefit plans in the S&P 500—a whopping 93%—are not fully funded, and this is having significant consequences for employees. Last summer, for example, the 70,000 participants in the United Parcel Service, Inc., pension plan learned that they will not earn increased benefits if they work after 2022. Six months earlier, DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands, Inc., offered some former employees a lump-sum buyout to offload some of its pension liabilities.4

By far, the most seriously underfunded pension plan in the S&P 500 is that of General Electric, a company that, per Deutsche Bank analyst John Inch, is a textbook example of the danger of misplaced assumptions in today’s business environment. In 2001, when Jeff Immelt replaced Jack Welch as CEO of General Electric, the company was sitting on a pension surplus of $14.6 billion. According to Inch, GE decided to put money into mergers and acquisitions instead of socking it away for what it owed its employees. By the end of 2008, the pension fund was running a deficit of $7 billion. Then, between 2010 and 2016, GE spent about $40 billion on stock buybacks, aimed at boosting the share price. The pension fund, on which more than 600,000 current and future GE employees and beneficiaries rely for their retirement benefits, is now running a deficit of $31 billion.5

“I don’t know what General Electric should do,” says Dinkin. “That situation is just going to have to play out. I do, however, know exactly what the leaders of any corporation should do if they see this kind of problem looming on the horizon: get help—and get it now—from a qualified, experienced outside advisor. Don’t wait for Congress to do whatever they’re going to do. Make a plan and act on it, because this problem is not going to go away. Companies which engage with professionals to analyze their business model, risk management, benefits offerings and financial options might—I emphasize might—be able to find an alternative to destroying the lives of those who have contributed to their success.”

About Cowden Associates:
Cowden Associates, Inc., headquartered in Pittsburgh, PA, was created in 2001 by the merger of Halliwell and Associates and MMC&P Spectrum Benefits, which was founded by Jere Cowden in 1986. Currently led by President & CEO Elliot Dinkin, Cowden Associates specializes in helping corporate clients find the best solutions, both for the enterprise and for its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting. Winning Workplaces and The Wall Street Journal have recognized Cowden Associates as a “Top Small Workplace,” a lifetime designation awarded to executives for their ability to build and lead savvy organizations. For more information, visit http://www.cowdenassociates.com

1.    Tankersley, Jim, and Rappeport, Alan, “1.5 Million Retirees Await Congressional Fix for a Pension Time Bomb,” New York Times, February 18, 2018.
2.    Biggs, Andrew, “U.S. State And Local Pensions Fund At Only Half The Levels Of Some OECD Countries,” Forbes, May 10, 2016.
3.    Edesess, Michael, “The reason underfunded pensions are a disaster waiting to happen,” MarketWatch, April 5, 2017.
4.    Kochkodin, Brandon, and Meisler, Laurie, “S&P 500’s Biggest Pension Plans Face $383 Billion Funding Gap,” Bloomberg, July 27, 2017.
5.    Egan, Matt, “GE’s $31 billion pension nightmare,” Money/CNN, January 19, 2018.

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Karla Jo Helms
JoTo PR
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