Why are defined benefit pension plans an issue today? Or what’s different?

By Suzanne Kelly

Defined benefit pension plans have been around for a number of decades, and there have always been times in economic cycles when some defined benefit pension plan sponsors have been unable to fulfill their commitments.  Sometimes it was because the sponsor faced a problem that was unique to them, and at other times it was because of wholesale structural changes in the industry that many sponsors could not adapt to.
What’s different today?  In the past number of years, “off shoring” has increased significantly, along with the mechanization of work.  These changes have helped move the U.S. economy from a manufacturing-based economy to a service-based economy.  At the same time we have seen enormous social changes. Workers are much more mobile than in any time in history, and many fewer baby boomers are spending twenty to thirty years at the same company.  All of these factors have resulted in employees having less interest in defined benefit pension plans.

But there are other factors in play now that may drive up the number of pension plans that terminate.  Legislative changes made in the Pension Protection Act of 2006 were meant to strengthen plan funding levels for private sector defined benefit pension plans by shortening the period over which underfunding is amortized from 30 to 7 years.  Unfortunately, the change to a shorter amortization period came into effect just as the U.S. entered the Great Recession. The stock market plummeted; the real estate market collapsed; and plans lost a significant share of their assets, making it much more expensive for plan sponsors to fund their plans as required.  For some plan sponsors it became impossible to fund their plans. An increasing number of sponsors were forced to terminate their plans, and all plan sponsors gained a new level of understanding of a large and volatile liability on their balance sheets.

Many of the same factors that buffeted private sector plans also impacted public sector plans.  While federal regulations don’t dictate the funding requirements for public sector plans, the plan sponsor is still supposed to fund their plan in a reasonable manner.  Many state, county and local governments borrowed money to fund their plans quickly to capture the benefit of the rising market. But the same market failures that impacted the funded level of private sector plans impacted the public sector plans. Now many state and local governments are faced with a need to both fund the plan and repay the debt. Public entities are limited by how much they can tax their citizens, and must make hard choices how to fund retirement liabilities but still provide for local services and invest in infrastructure. 

Most private sector and public sector pension plans could have survived all this had the market rebounded quickly, businesses recovered and interest rates returned to historical norms.  But this hasn’t happened.  New solutions are called for to deal with the structural problems faced by defined benefit pension plans. 

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KGSR-157266by Suzanne Kelly, Co-Founder & Principal KGSR

Welcome to our website, Kelly Garfinkle Strategic Restructuring LLC, or KGSR. We are a new boutique firm dedicated to helping all parties find solutions to pension issues that support a secured retirement for employees at a predictable and sustainable cost for employers.

The increasing mobility of workers and rising and variable costs associated with the current defined benefit pension plan model demands new solutions for a guaranteed retirement income. The best outcomes are developed when all parties come to the table armed with an understanding of all the options and a willingness to try new solutions.

We are known for our expertise in pensions, restructurings and crafting solutions to complicated problems. When we hear "it hasn't been done before," we are not discouraged but are inspired by the opportunity to create a new solution that helps everyone achieve their goals. We understand that the problems faced by public and private plan sponsors, participants, unions and investors are unique and complicated. Each problem requires a customized solution that breaks new ground. KGSR is committed to producing solutions that meet our clients' needs.

In future blogs, Mo and I will update you on issues affecting our industry. If you have questions or topics you would like us to address, please e-mail us at This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or click on Contact Us and leave us a message.