Like the Cheshire Cat, Defined Benefit plans are slow in vanishing

Like the Cheshire Cat, Defined Benefit plans are slow in vanishing
"All right," said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone. (Lewis Carroll (1865), Alice’s Adventures in Wonderland) Artwork: Morphart Creation
Like the Cheshire Cat, Defined Benefit plans are slow in vanishing
"All right," said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone. (Lewis Carroll (1865), Alice’s Adventures in Wonderland) Artwork: Morphart Creation

 

Private sector Defined Benefit plans are seen by many as on their way to becoming part of history. Their total liabilities probably peaked in 2012 at around $2.3 trillion. A growing number are now frozen, or at least closed to new entrants (possibly the majority… unfortunately the PBGC has not published new data on this point for a while now.) It’s generally accepted that the future is Defined Contribution.

But the impact of the DB system will take a long time to dissipate. Like Lewis Carroll’s Cheshire Cat, it will vanish slowly.

The chart below shows the total contributions to private sector single employer DB plans each year from 1975-2012¹. This is taken from the recently-released Form 5500 data, which runs through the end of 2012.

Private Sector Single Employer Defined Benefit Plan Contributions 1975-2012

Total contributions to private sector single employer DB plans each year from 1975-2012
Source: Department of Labor

¹The data shown is for plans with more than 100 participants.

We see that the impact of these plans on the sponsoring corporations is anything but vanishing. Of course, the impact is not evenly spread across the whole of the private sector. The importance of pension plans is much greater in some industries and at some corporations than it is at others. That’s why some plans are being more aggressive in reducing pension risk than others. The aggregate picture, though, is one which shows that DB plans will continue to be a major consideration for many CFOs for a long time to come.

The Form 5500 data is also the best source for keeping track of the relative performance of DB and DC plans. In 2012, it was another win for DB (11.5% versus 10.9% for DC.) That means that DB plans have outperformed DC in 13 of the past 14 years, and that a dollar invested on January 1, 1993 and earning DB rates of return would twenty years later have been worth $4.48; earning DC rates of return, just $3.73.

I did start to write a blog dissecting those return numbers, but it’s basically the same story that it was a year ago—so I’ll just provide a link to last year’s post instead. There’s been a lot done in the past few years to build more institutional best practices into DC programs, and that’s something that needs to keep happening now that DC plans are the biggest (but not the only) game in town.


USI-21051-12-17

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