In the first fiscal quarter of 2023, top leaders at JP Morgan Asset Management published a rather head turning report suggesting to corporations that they get back into offering defined benefit pensions, as it would be a good thing for the bottom line.
Yes, you read that correctly.
Authored by J.P. Morgan’s Head of Institutional Portfolio Strategy Jared Gross, and Head of U.S. Pension Strategy, Michael Buchenholz, the report, titled Pension Defrost, offers a roadmap back to corporate HR departments renewing interest in offering defined benefit pension plans.
It explains, corporate sponsors of defined benefit plans “have developed a collective blind spot about the potential value of maintaining a well-funded pension.”
The Pension Defrost report goes on to compare the merits of Defined Benefit plans vs Defined Contribution plans.
Defined benefit plans are a fixed, pre-established benefit for employees at retirement, whereas a defined contribution plan is when the employee, employer, or both contribute to a retirement plan with regularity.
Most, if not all, of our fellow retirees earned defined benefit pensions during their working years. Some opted for lump sums at retirement, while others had their pensions de-risked into a group annuity. Still, others remain within the safety of their company sponsored plan.
What is clear is that as defined benefit plans have become less and less popular with private employers. According to the Bureau of Labor Statistics, in 2019, only 26% of civilian workers had access to a defined benefit plan.
The J.P. Morgan team finds that companies typically will go with the most cost-effective option available, to preserve their bottom line, explaining, “a DB plan’s ability to capture excess returns over the liability makes it, on average, less costly over time than a DC plan, which is 100% paid out of the sponsor’s pocket.”
In contrast the defined contribution plan requires sponsors or employers to provide continued financial contribution and as 401(k) employee contributions grow, so does the employer contribution. According to the study, “since 1993, on average the increased cost of these contribution plans has gone up consistently as a compound rate of 5.9%.”
The report also points out that plan sponsors don’t need to put their eggs all in one basket. The report stated, “Despite the increasing alignment of defined benefit and defined contribution objectives, the different plan structures vary in their capacity to satisfy key goals; providing only one or the other can be a limitation.”
Pension Risk Transfers – Not as cost effective as previously thought.
As we have witnessed, pension de-risking occurs when private companies transfer their fiduciary management and oversight of defined benefit plans of retirees to another institution, typically an insurance entity.
According to an analysis by Retirees for Justice Executive Director Edward Stone, there will be some $300 billion in retiree pension assets offloaded to insurance companies in the last decade, up nearly 50 percent in just about the last two years.
JP Morgan’s assessment claims, “Commonly used measures of pension risk are flawed, leading sponsors to overstate the benefits of getting rid of their pension plans through pension risk transfer transactions, and to understate the potential benefits of maintaining prudently invested plans.”
JP Morgan’s investment pros say that the return on investment from a pension risk transfer actually falls short of the expected return on a stable portfolio.
Ultimately, JP Morgan’s research found that “defined benefit plans can provide economic, strategic and social benefits to both employers and plan participants.”
Hopefully with these findings, employees can find their way back to secure and stable pension benefit plans that will set them up for their golden years.
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