US - As the debate in the US over cash balance and pension equity plans heats up following the release of proposed new rules governing these plans, experts at Watson Wyatt warn that common misperceptions still abound.
“Critics try to paint all conversions to cash balance plans as attempts by companies to cut costs at the expense of workers, but the facts simply do not support these assertions,” said Sylvester Schieber vice president of research at Watson Wyatt.
A study published by Watson Wyatt found:
- The typical company realises little, if any, net cost savings when it shifts from a traditional pension to a cash balance or other hybrid plan design.
- When employer costs remain neutral, almost 80% of participants do better under the hybrid plan formula.
“With traditional pension plans, more than three-quarters of benefits can go to only 10% of workers and, naturally enough, that 10% would like to keep them,” said Eric Lofgren, global director of benefits consulting at Watson Wyatt.
“But how is that fairer than newer designs that seek to distribute benefits more democratically among workers?”
It is important to separate the distinct issues of pension plan type and the amount of cost savings, according to Lofgren.
“No one type of pension plan is inherently more costly than another, and the oft-stated equation that cash balance plans reduce benefits by 20-50% is proved false by our research,” he added.
“An employer can just as easily design a rich cash balance plan or a stingy traditional pension.”
In April, Lofgren and Schieber testified at an IRS hearing on proposed pension regulations.
The Watson Wyatt study found that the majority of employers (55%) experienced a minimal effect on costs or saw costs increase during hybrid plan conversions, while less than half (45%) realised cost savings. The average employer cost savings was just 1.4%, not 20-50%, after factoring in enhancements that some employers made simultaneously to their 401(k) plans.
The study found that when companies reduced costs in the conversion it was largely because of the prospective elimination of subsidies for early retirement, which typically augment benefits at around age 55.
The Watson Wyatt study was based on analysis and financial modelling of the benefit provisions in 78 hybrid plans.
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