CalPERS has averaged an annual rate of return on its investments of 9.1 percent over the past decade and 8.1 percent over the past 30 years. (Photo by Graham Womack)

Status Check: Cloudy Days for Pensions?

COVID-19 might lead to even fewer defined-benefit pensions in the private sector

Back Web Only May 25, 2020 By Graham Womack

Eric Petersen’s clients, by and large, don’t seem to be panicking. But these days, the small number among Petersen’s client base at Hicks Pension Services in Fremont who still offer defined-benefit pensions are calling him with questions related to the coronavirus pandemic.
 
“I know for sure, many, many companies will be dropping this defined benefit,” says Petersen, who estimates 15 percent of employers he works with provide defined-benefit pensions, plans that guarantee a set payout to retirees rather than a set contribution. More and more private sector employers have switched to the latter in recent years, most commonly through 401(k) plans, according to CNN. Public pensions, on the other hand, primarily remain defined-benefit plans.
 
“The (clients) that are struggling, we’re freezing future accruals right now,” Petersen says.
 
It’s still early to fully gauge what effects the coronavirus economic shutdown will have on the pension landscape, which was battered by the Great Recession and has faced uncertainty since, as Comstock’s reported in November 2019 (“How Safe is Your Pension?”). Still, the preliminary outlook for certain parts of the industry, particularly with defined-benefit plans, isn’t overly encouraging.
 
Part of the challenge with defined-benefit plans is that they have mandatory company contributions and protected accruals. Once these plans are agreed to, even if they are frozen, they can impose massive financial obligations down the road. Case in point: McClatchy Co., which froze its pension plan in March 2009, will have its pension and its $535 million shortfall taken over by the federal Pension Benefit Guaranty Corporation if a bankruptcy judge rules the company can’t survive otherwise, according to a McClatchy story.

Marc Roberts, president and an owner of Associated Pension Consultants in Sacramento, was in conversation with clients as financial markets began a steep descent in March.
 
“We were contacting clients saying, ‘OK, interest rates have declined. Market value of your assets has declined,’” Roberts tells Comstock’s. “And who knows, with everything that’s going on, you may not be having a real good year in 2020 as far as financially. Do you want to possibly freeze your defined-benefit plan … as a safeguard in case it doesn’t turn out very well and you don’t have the cashflow to put the monies into the plan as required? And we had a lot of clients that went with that.”
 
Other parts of the retirement landscape have been calmer. The Coronavirus Aid, Relief, and Economic Security, signed into law March 27, made it easier for people to access retirement income, particularly from 401(k) plans, for loans or distribution, says Jennifer Anders-Gable, managing attorney at the Western States Pension Assistance Project.
 
“There have been some people who are interested in those implications, but so far, we haven’t received an overwhelming amount of those calls,” Anders-Gable says. “Frankly, I’m hoping that we don’t. Because the key to retirement income is that it’s there when you need it in retirement.”
 
Meanwhile, Ted Toppin, chair of Californians for Retirement Security, which represents about 1.2 million employees, says that two major retirement organizations in the state, CalPERS and CalSTRS, were prepared for a crisis such as COVID-19. While each incurred paper losses in March, CalPERS and CalSTRS developed strategic plans after the Great Recession and can now take advantage of discount investment opportunities. “They have been a calm voice,” Toppin says.
 
Toppin is encouraged by the long-term prospects, saying that he noted in a recent op-ed for The Sacramento Bee that CalPERS has averaged an annual rate of return on its investments of 9.1 percent over the past decade and 8.1 percent over the past 30 years.
 
Toppin is irked that critics continue to attack public pensions as unsustainable. “Defined-benefit pensions really are sort of the only way to provide retirement security in a systemic way,” he says. “It’s unfortunate that the private sector has moved so far away from it.”
 
He adds, “If you have a reasonable system that looks out for its sustainability, it can work in the public and private sector. Folks should worry less about trying to take it away from public employees and spend a lot more time thinking about how to provide retirement security to public and private sector employees.

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