There may be a new kid on the block for American private-sector pensions. Something called a “composite” pension plan has entered the scene as a new alternative to traditional defined benefit and defined contribution plans.
Last week, the House Education and Workforce committee held a hearing to consider the merits of composite plans for multiemployer pension plans. According to the Department of Labor, there are 2,740 multiemployer pension plans (about half of which are defined benefit plans) covering over 15 million private workers and holding $624 billion in assets. Multiemployer pension plans made headlines last fall when the PBGC—an independent government agency that insures private pension plans—announced that multiemployer plans had a $42.4 billion deficit and many will likely run dry in the next ten years, prompting Congressional action. PBGC estimates that up to 10 percent of the 1,427 multiemployer defined benefit plans are likely to become insolvent.
Modeled after Canadian target and lesser-known variable benefit plans, the proposed composite plans could help address some of the funding challenges facing multiemployer plans. Here’s how they work:
- Composite plans currently have no legal category, but presumably seek to retain the better elements of a defined benefit while promoting better funding discipline and the predictable employer costs of a defined contribution plan.
- Under a composite plan, workers would receive a lifetime annuity. Assets and longevity risks would be pooled as they are in current multiemployer defined benefit plans and so would expect higher benefits than 401k or defined contribution plans.
- However, benefits would be tied to the plan’s performance so employees would share some of the risk alongside employers. Plans would set threshold or "hurdle" rate based on a conservative investment return. If a plan equals the hurdle rate, the plan basically functions the same as a traditional defined benefit pension plan. But if a plan’s investment rises above or falls below the hurdle rate, then benefits get boosted or decreased accordingly.
- Workers are guaranteed a floor of lifelong benefits and so won’t risk outliving their benefits. Unlike a traditional pension plan, however, the the exact amount of benefits isn’t promised ahead of time.
- The recommended composite plans would require 120 percent funding of actuarial projected cost of benefits. Boosting benefits would be closely tied to the plan’s funding, so employers can’t make generous promises that they can’t keep. If a plan falls below 100 percent funding, benefits would also drop, thereby incentivizing workers to ensure full funding through collective bargaining.