One of the more striking demands of the auto workers during the recent UAW strike was for the Big Three to bring back pension plans. Yes, the same plans that "created massive migraines in Detroit boardrooms" during the financial crisis when the industry faced $77 billion in underfunded pension liabilities, before two of the Big Three carmakers ultimately filed for bankruptcy.
And that was before fifteen years of near-zero interest rates created similar headaches for the rest of corporate America. The pension obligation of the Milliman 100 largest plans hit an all-time high of $1.8 trillion in 2018 as the discount rate for future liabilities sank below 3.5%. That was a four-point rate drop from 1999, when obligations were only around $750 billion. By 2021, "the volume of faltering pension plans got so large it nearly felled the federal insurer," or PBGC, which backstops corporate plans. It was projected to become insolvent by 2026 before getting help from the Covid-era American Rescue Plan.
Needless to say, boardrooms have been more than happy to make pensions a relic of the past. Workers, though, put a high value on the security that comes with guaranteed corporate payouts in retirement, as opposed to self-managed 401(k) investment plans. And suddenly, the return of high interest rates may offer an opportunity for pension plans to make a comeback.
As Telis Demos details in The Wall Street Journal, high rates have helped boost corporate pensions by lowering the current value of future payout obligations. The top 100 plans, according to J.P. Morgan, achieved a 103% funded status last year, from a low of 77% in 2012.
When rates were at their nadir post-Covid, "it would have cost around $1.2 million in today's dollars to provide a $100,000 annual retirement annuity to a 45-year old," J.P. Morgan calculates in the article. At current discount rates, "it would only cost around half a million." That's a huge difference. It also comes as employers have faced escalating costs for their employee 401(k) match contributions over the years. One pension trade group even argues pensions can be cheaper for companies that 401(k)s.
If these do return, it may be more under the guise of "annuities" or other hybrid offerings that could exist within the 401(k) structure. Some providers are already working on such offerings, and lobbying groups have been continuing to push Congress in that direction. Indeed, many larger companies who still offer pensions are actually taking advantage of their better funded status to offload them to insurance companies to administer.
But the return of pension-like offerings to private sector workers could actually come at a critical time. If the private sector can find appealing ways for both workers and employers to offer better retirement security, it could help shore up household finances as future Social Security benefits may have to be "tweaked" to keep the program financially viable.
That could perhaps even entice public sector workers off of traditional plans that are costly to taxpayers. Some 86% of state and local employees have access to pensions, versus just 15% of private-sector workers, according to the Labor Department. Just imagine if those numbers were reversed! Public pensions are generally in much worse shape than corporate plans. Their funded status fell to 77% last year, although there is significant dispersion, with three states funded over 100% and more than a dozen below 70%, per Equable.
In other words, the very same development that has dramatically worsened the budget deficit--high interest rates--is the same one that could potentially offer a creative way out of the country's long-term fiscal problems, by transferring them to the private sector.
See you at 1 p.m!
Kelly
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