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As pensions go down the drain
Jul. 22nd, 2005 09:52 amTwenty years ago I worked for an actuarial/pension planning company (database/billing system work). Their business is to provide the legal verbiage to create retirement plans for companies. They also calculate retirement benefits, it’s part and parcel to pension plan management.
(I will preface this with the obligatory IANAL: I am not a lawyer, and IANACPPS, not a certified pension plan specialist.)
Largely speaking, there are two types of retirement plans (at least that I’m aware of): Defined Benefit (DB) and Defined Contribution (DC). A DB plan is one where the EMPLOYER makes contributions to the plan for you, and when fully vested and upon retirement or termination of employment, you start receiving disbursements. A DC plan is also known as a profit sharing plan, the employer makes contributions WHEN THERE’S A PROFIT for the company. Generally the employee is allowed to make contributions to DC plans, maybe sometimes to DB. There is usually a cap to how much you can put in, and the company frequently matches 4-6% of what you contribute (if you are part of a DC plan and the employer matches – TAKE IT! That’s free money! You’re effectively getting a 4-6% pay increase that has a front-end cost but really benefits in the end, just make sure the entire DC plan isn’t invested in the company!)
The term “profit” is critical here.
It is not difficult, witness Enron, WorldCom, etc., to manipulate your company’s apparent financial standing. As a business owner, you want to make sure you’re sufficiently profitable because you want to make money. And if you are a stock-issuing corporation, you want to make sure you produce dividends according to Wall Street’s dictates because you’re truly screwed if you fail the gods of Wall Street. At the same time you want to minimize your tax liability.
How do you minimize tax liability? By minimizing profits.
A DC plan is an excellent opportunity for a company to say “Uhhh, geez, we weren’t sufficiently profitable and won’t be making contributions to the retirement plan this year.”
I was with this company from ’85-’88 and I recognized this ability for employers to wiggle out of retirement plans, and I saw A LOT of companies take the opportunity.
Well, Hewlett-Packard has joined those ranks. (to be fair, lots of large companies have)
HP is axing it’s DB plan and replacing it with a DC. If you age and years of service totaled are at least 62, your pension plan is unchanged. If you’re a new hire after 1/1/2006, you don’t get into the DB plan and have to live with a DC, but HP did increase the matching percentage of the DC plan from 4% to 6%.
But if you’re an existing hire and you don’t hit that magic 62, HP will no longer make contributions to the plan for you.
But that’s OK, it will save the company $300 million per year. No mention as to whether any medical insurance will be affected at this time. And at the same time, HP is axing 14,500 people.
According to the article, in 1985 91% of employers had DB plans. In 2004 that number dropped to 68%. And “…27 percent of big employers surveyed late last year said they were likely to start excluding new hires from pension plans starting in 2005, and 18 percent are planning to freeze pension contributions for some or all employees.”
Lovely ol’ world, innit?
http://www.siliconvalley.com/mld/siliconvalley/12177822.htm
I do have to say one thing in favor of HP that can't be said about a lot of other companies. At least they didn't default on the pension plan and stick the Pension Benefit Guarantee Corporation (PBGC, a gov't org that you buy insurance from in case your company goes bankrupt) with their pension responsibilities like some corps have. Plans are analyzed annually to see if they're properly funded, if they are not, they are underfunded and have problems. The PBGC has been raided so many times in the last decade or so that IT is on the verge of collapse. Very not good.
(I will preface this with the obligatory IANAL: I am not a lawyer, and IANACPPS, not a certified pension plan specialist.)
Largely speaking, there are two types of retirement plans (at least that I’m aware of): Defined Benefit (DB) and Defined Contribution (DC). A DB plan is one where the EMPLOYER makes contributions to the plan for you, and when fully vested and upon retirement or termination of employment, you start receiving disbursements. A DC plan is also known as a profit sharing plan, the employer makes contributions WHEN THERE’S A PROFIT for the company. Generally the employee is allowed to make contributions to DC plans, maybe sometimes to DB. There is usually a cap to how much you can put in, and the company frequently matches 4-6% of what you contribute (if you are part of a DC plan and the employer matches – TAKE IT! That’s free money! You’re effectively getting a 4-6% pay increase that has a front-end cost but really benefits in the end, just make sure the entire DC plan isn’t invested in the company!)
The term “profit” is critical here.
It is not difficult, witness Enron, WorldCom, etc., to manipulate your company’s apparent financial standing. As a business owner, you want to make sure you’re sufficiently profitable because you want to make money. And if you are a stock-issuing corporation, you want to make sure you produce dividends according to Wall Street’s dictates because you’re truly screwed if you fail the gods of Wall Street. At the same time you want to minimize your tax liability.
How do you minimize tax liability? By minimizing profits.
A DC plan is an excellent opportunity for a company to say “Uhhh, geez, we weren’t sufficiently profitable and won’t be making contributions to the retirement plan this year.”
I was with this company from ’85-’88 and I recognized this ability for employers to wiggle out of retirement plans, and I saw A LOT of companies take the opportunity.
Well, Hewlett-Packard has joined those ranks. (to be fair, lots of large companies have)
HP is axing it’s DB plan and replacing it with a DC. If you age and years of service totaled are at least 62, your pension plan is unchanged. If you’re a new hire after 1/1/2006, you don’t get into the DB plan and have to live with a DC, but HP did increase the matching percentage of the DC plan from 4% to 6%.
But if you’re an existing hire and you don’t hit that magic 62, HP will no longer make contributions to the plan for you.
But that’s OK, it will save the company $300 million per year. No mention as to whether any medical insurance will be affected at this time. And at the same time, HP is axing 14,500 people.
According to the article, in 1985 91% of employers had DB plans. In 2004 that number dropped to 68%. And “…27 percent of big employers surveyed late last year said they were likely to start excluding new hires from pension plans starting in 2005, and 18 percent are planning to freeze pension contributions for some or all employees.”
Lovely ol’ world, innit?
http://www.siliconvalley.com/mld/siliconvalley/12177822.htm
I do have to say one thing in favor of HP that can't be said about a lot of other companies. At least they didn't default on the pension plan and stick the Pension Benefit Guarantee Corporation (PBGC, a gov't org that you buy insurance from in case your company goes bankrupt) with their pension responsibilities like some corps have. Plans are analyzed annually to see if they're properly funded, if they are not, they are underfunded and have problems. The PBGC has been raided so many times in the last decade or so that IT is on the verge of collapse. Very not good.
