Twenty-four financial services companies have formed the Alliance for Lifetime Income, whose objective is to educate Americans about the importance of protected lifetime income solutions. The group plans to do this with online and offline content, tools, thought leadership, events and new terminology to simplify this complex topic.
“The Alliance for Lifetime Income believes the possibility of outliving hard-earned savings is a real threat to the financial and emotional well-being of Americans currently in or approaching retirement,” says Colin Devine, educational adviser for the alliance. “Even people who spend their whole lives growing their savings worry they will be unable to maintain their desired lifestyle in retirement.”
The alliance conducted a survey of Baby Boomer and Generation X households and found that 48% of those with people aged 45 to 72 with investable assets between $75,000 and $1.99 million have no protected monthly income, such as annuities, other than Social Security.
On the other hand, 88% of protected households say they are confident their retirement money will help them achieve their lifestyle goals, and 77% say they are not worried about their retirement. Further, 80% are confident they will be able to withstand losses in the markets or unexpected expenses. This is true for only 63% of unprotected households.
Among the members of the Alliance for Lifetime Income are AIG, AXA Equitable Life, Franklin Templeton, Goldman Sachs Asset Management, J.P. Morgan, MassMutual, Milliman and Nationwide.
If a solution is not found, “claims for financial assistance by plans will quickly bankrupt the Pension Benefit Guaranty Corporation [PBGC] multiemployer insurance program,” Christopher Langan, vice president of finance for United Parcel Service (UPS), told the committee. “Retirees under these plans would then see their benefits drop to just a fraction of the already modest benefit guarantee.” Langan said the crisis is the result of “macro changes to many of the established industries in the United States with significant multiemployer plan participation and the 2008 market crash—which happened when many plans were still recovering from the earlier burst of the dot-com bubble.”
Langan said the macro changes include deregulation of industries, which gave rise to nonunionized workers, increased competition from foreign companies, and outsourcing of work to other countries. In addition, he said, the number of Baby Boomers retiring is putting pressure on the system, all the while participation in multiemployer plans has declined. The ratio of retirees in multiemployer pension plans rose from 48% in 1995 to 63% in 2013, he said. This has resulted in many companies going bankrupt and pulling out of a multiemployer plan, which increases the pressure on the remaining companies, he said. Finally, there has been an unusually low-interest-rate environment since the 2008 recession, he said.
The solution is not to require employers to contribute more, Langan said. Since the passage of the Pension Protection Act of 2006 (PPA), many employers are contributing twice what they were before the law was enacted, he said. To require employers to contribute more might put them out of business, exacerbating the multiemployer pension plan crisis, he said.
Furthermore, reducing benefits for retirees is not an option, either, as they have been counting on these benefits, Langan said. “For many participants, their modest pension benefits and Social Security are the only available source of income in retirement, and they have no other meaningful source of savings,” he said.
Langan said that a long-term, low-interest-rate loan program “could save the most troubled plans without imposing undue hardship on participants, contributing employers, the PBGC, the federal government, taxpayers or healthy plans.”
Aliya Wong, on behalf of the U.S. Chamber of Commerce, agreed with Langan that required employer contributions have become onerous and told Congress, “The contribution rates that many employers are currently paying into multiemployer plans are exorbitantly high because the contribution rates for the last several years have been imposed by the plans’ trustees via rehabilitation plans.”
Like Langan, Wong agreed that long-term, low-interest loans may be the solution. “While the PBGC may ultimately need more money, in the form of increased premiums paid by employers, these increases must be evaluated after tools to restore the solvency of these plans are put in place,” she said.
Mary Moorkamp, on behalf of Schnuck Markets, said, “The Food Association believes that the solution to the multiemployer funding crisis will require multiple phases. The fundamental rules governing multiemployer plans date back nearly 40 years and have not kept pace with the new economy, changing demographics, and today’s mobile work force. The system needs to be overhauled.”
That said, Moorkamp said the crisis is so pervasive that “immediate action is needed, and any realistic action must involve some federal loan structure, coupled with contributions and sacrifices by all other stakeholders.” She said that a long-term, low-interest-rate federal loan program should be paired with reductions in benefits and increased PBGC premiums.
Burke Blackman, president of Egger Steel Co., suggested that the committee independently assess the underfunding of multiemployer pension plans. His second recommendation was to “transition ‘orphaned’ beneficiaries to the PBGC,” and a third was to “stop making new defined benefit [DB] commitments”—rather, to open defined contribution (DC) plans. “The pension system may require federal loans to satisfy its short-term cash flow needs, but if it stops making new commitments while continuing to collect contributions, it will eventually be able to pay back its loans. We need to admit that the era of defined benefit retirement plans is over,” he concluded.