mardi 12 juin 2018

Risk Shared Pension Plan

One of the latest creation in Pension Plan scheme is the Risk Shared Pension Plan(Shared Plans). In many ways, it's superior to the traditional DB and DC. In my mind it solves the great dilemma between offering an adequate pension for retiree and remove the risk of future expense and contribution volatility. In short it offer reasonable secure pension, stable and sustainable contribution requirement.

I believe that the objective of a pension plan should be to provide an adequate pension and funding it appropriately. For this end, Shared Plans provides an expected pension upfront to the member. Funding is made on current contributions. No one is behind to guarantee payment. If funding become insufficient, than benefits are cuts. To avoid the cuts, the current employee and sponsor can poney up more funds voluntary. The benefits are calculated in advance so that 97.5% of the time, there should not be any reduction of benefits.

A pension plan should aim to have stable contribution funding, be sustainable and be secure. These features makes the design to be more stable, contribution are known in advance. The sponsor is not required to pay more or less due to market return. Since DC sponsor(EE+ER) do not contributes more or less due to market return, why should the DB sponsor should? The design is substainable. If the fund disappear for whatever reason the outflows will be adjusted. The design is more secure.

For those who have DC account the principal problem is that employee have just about no clue on if it will be enough at retirement. Those who contribute often contribute not enough and do not adjust up their contribution. I believe that we cannot/should not expect that a person with no financial education be able to make financial decision without expert helps. Currently DC general philosophy is that the member knows best. DC guideline are for the plan to suggest to get help. Shared Plan instead provides a guideline for what their current contribution will be able to provide as a pension. If there's a short fall in contribution, warning bell activate to review the plan (either increase contribution or decrease pension). The employer of DC and Shared Plan are equally happy not to have to fund future funding issue.

For those lucky few who have DB, the employee often feel confident that his pension is known in advance and well funded. On the funding side, it is not the whole truth. The Employer must fund it. The guarantee is as strong as the company behind it and the current funding. Sears employee were angry to see their benefits cuts by 20% due to the company going down. Instead a Shared Plan would have seen that their pension to be cut far in advance and thus with lower pay cut.

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