The Scholar | Pension360

The Accounting Implications of Job-Hopping and the Shift to 401(k)s

Two trends have been building in recent years, and now they are set to collide: on one hand, employers are increasingly shifting workers into defined-contribution plans. On the other, workers are becoming more likely to move between companies numerous times over the course of their working lives. Those trends together are bound to butt heads. Canover Watson writes:

As with many other major Western economies, the US in recent decades has seen its pensions landscape shift away from “defined benefit” (DB) to “defined contribution” (DC) plans […] The move from the former to the latter is unmistakable. […] DB plans tend to favour long-tenured employees, are not transferred so easily between employers, and so are less suited to a highly mobile workforce.

The effective result of this transition is that individual savings accounts, originally intended to supplement DB plans, have ended up supplanting them. This has rendered the question of optimizing returns from investments a cornerstone of the pension debate, as these returns now directly dictate the employees’ eventual retirement income.

Present and future retirees’ exclusive dependence on 401(k)s has upped the ante for all stakeholders–these funds need to achieve consistent returns required to provide liveable, income during retirement. But different funds and managers operate in different ways, and those differences are amplified when a worker switched employers numerous times. From Canover Watson:

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation-namely the adoption of a master accounting system at the level of the pension fund.

The shift to DC plans and the multimanager model, both represent a step forward: the creation of a more sustainable, efficient system for ensuring that citizens are able to generate sufficient income for their retirement years. Yet, unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

To read the rest of this journal article, click here.

The article was published in the Journal of Pension Planning and Compliance.

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Does Knowledge Of Pension Reforms Affect Retirement Decisions?

If you knew your pension fund was in great shape, would it alter when you chose to retire? Conversely, if you knew your fund was in dire straits, would it increase the probably of working part-time during retirement?

Two Norwegian researchers set out to answer those questions. As published in the Journal of Pension Economics and Finance:

We present the results of a survey experiment where the treatment group was provided with an information brochure regarding recently implemented changes in the Norwegian pension system, whereas a control group was not. We find that those who received the information are more likely to respond correctly to questions regarding the new pension system. The information effect is larger for those with high education, but only for the most complex aspect of the reform. Despite greater knowledge of the reform in the treatment group, we find no differences between the treatment and control group in their preferences regarding when to retire or whether to combine work and pension uptake.

Read the entire paper here.

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Defined benefit pension plan distribution decisions by public sector employees, by Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Authors: Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Journal: Journal of Public Economics

Abstract: Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

Get access to the entire article here: http://www.sciencedirect.com.flagship.luc.edu/science/article/pii/S0047272713001126

An analysis of critical accounting estimate disclosures of pension assumptions, by Mark P. Bauman and Kenneth W. Shaw

Authors: Mark P. Bauman and Kenneth W. Shaw

Journal: Accounting Horizons

ABSTRACT: Accounting for defined-benefit pension plans is complex, and reported financial statement amounts are significantly impacted by a myriad of assumptions. In its interpretative release FR-72 (2003), the SEC called for more informative and transparent Management Discussion and Analysis (MD&A) disclosure of critical accounting estimates (CAE), including those regarding pension plans. This paper uses a random sample of 147 firms with relatively large defined-benefit pension plans to analyze firms’ MD&A pension-related critical accounting estimate disclosures.

Get access to the rest of the article here: http://aaajournals.org/doi/abs/10.2308/acch-50823

An Update On Pension Obligation Bonds [Center for Retirement Research]

The Center For Retirement Research has released a new brief on the state of Pension Obligation Bonds (POB) – the debt vehicle used by many state and local governments to cover their pension contributions. The report reveals that POB’s do provide the budget relief governments are looking for. But that relief doesn’t come with its downsides.

From the brief:

The brief’s key findings are:

Some state and local governments issue Pension Obligation Bonds (POBs) to cover their required pension contributions.

POBs offer budget relief and potential cost savings, but also carry significant risk.

POBs had anegative average real return from 1992-2009, but show a small gain when the time period is extended to 2014.

POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments.

But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.

Read the whole report here:

http://crr.bc.edu/briefs/an-update-on-pension-obligation-bonds/

Understanding Public Pension Debt: A State-by-State Comparison

A new report is out from the Competitive Enterprise Institute, authored by Robert Sarvis.

From the abstract:

State government pension debt burdens labor markets and worsens the business climate. To get a clear picture of the extent of this effect around the nation, this paper amalgamates several estimates of states’ pension debts and ranks them from best to worst.

Today, many states face budget crunches due to massive pension debts that have accumulated over the past two decades, often in the billions of dollars. There are several reasons for this.

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

Read the full report here:

http://cei.org/sites/default/file/Robert%20Sarvis%20-%20Understanding%20Public%20Pension%20Debt.pdf

Litigating for the Future of Public Pensions in the United States

Author: Paul M. Secunda, Marquette University – Law School

ABSTRACT: It is nearly impossible in the United States today to go long without reading a headline about some aspect of the American public pension crisis or about some State undertaking public pension reform. Public pensions are horribly unfunded, millions of public employees are being forced to make greater contributions to their pensions, retirees are being forced to take benefit cuts, retirement ages and service requirements are being increased, and the list goes on and on.
These headlines involve all level of American government, from the recent move to require new federal employees to contribute more to their pensions, to the significant underfunding of state and local public pension funds across the country, to the sad spectacle of the Detroit municipal bankruptcy where the plight of public pensions plays a leading role in that drama. The underfunding of public pension plans has led not only to a number of bankruptcy proceedings, but has also led various states to reduce promised pension payouts to retired plan members or to increase pension contribution requirements for active employees.
As a result, government officials, employees, and retirees are in the midst of litigating for the future of American public pensions. This article focuses on all three levels of American government (federal, state, and local), and reviews the current status of pension litigation at each level.

Get the entire article at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443147

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Finding Common Ground In Pension Reform: Lessons from the Washington State Pension System

“In the wake of the economic recession, public pension plans have emerged as an increasingly salient and contested public policy issue. The debate over public pensions is driven in large part by the fact that many public retirement systems are significantly under-funded. For example, numerous estimates peg the national shortfall in public pension assets relative to liabilities at several trillion dollars.

Given the pervasiveness of funding shortfalls, there have been proposals to shift public-sector pensions from defined benefit (DB) plans towards defined contribution (DC) plans which are, by definition, fully-funded. However, this approach is not without controversy, as it shifts the future risk associated with investment returns earned on pension assets away from taxpayers and towards employees and raises questions about employee preferences for different types of pension plans and how reform might affect retirement security and workforce composition. In addition, moving towards a DC-type pension system does nothing, by itself, to address existing shortfalls.” Read the complete report here.

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After Detroit: How Will Illinois and Its Communities Respond?

Detroit’s fiscal struggles, particularly its bone-dry pension system, have been well documented over recent years. But the city’s problems aren’t unique–and Chicago is one city that is currently dealing with many of the same pension-related fiscal pressures as Detroit. To discuss these problems, the Civic Federation and the Federal Reserve Bank of Chicago held a forum on April 23, 2014, that brought together over 140 participants. Now, the Federal Reserve Bank of Chicago is giving us an inside look at that conference, and has released a detailed article about what was discussed.

To read the article, click here.

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Pension Choices and the Savings Patterns of Public School Teachers

The Center for Education Data and Research has released a new report analyzing the Washington state’s teacher pension system. The system is of particular interest because, since 1996, it has given every participant a choice: enroll in a traditional defined-benefit plan, or enroll in a hybrid plan that combines features of both defined-benefit and defined-contribution plans.

Pension systems around the country are increasingly giving participants a similar choice, and many more systems are thinking of turning to hybrid plans in an effort to curb future underfunding problems.

So, does a choice-based system work? What outcomes does it produce?

Find out: Read the full report here.

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