Andy Lang
03-14-2003, 12:50 PM
You do want to save DB pension plans don't you?
Here is your chance to speak up. Although the time deadline for comments is now over, you can still write your congresspeople.
I'm off to Italy! (almost anyway)
March 13, 2003
Internal Revenue Service
POB 7604
CC: ITA: RU (Reg-209500-86, Reg-164464-02), RIN 1545-BA10, 1545-BB79
Ben Franklin Station
Washington, DC 20044
Dear Sir or Madam:
My name is Andy Lang and I am a pension actuary. I am a Fellow of
The Society of Actuaries (FSA) and a Member of the American Academy
of Actuaries (MAAA). My comments here, however, are solely my own.
I have more than 40 years of actuarial experience, most of it as a
pension actuary, from the beginnings of their great growth period,
1961 to 1980, to the beginnings of their current-day near collapse,
in the 1980s.
I left the pension consulting industry in 1990, as a Principal
(shareholder) at Towers Perrin, then the world's largest management
consulting firm in the world specializing in human resources, and the
largest single employer of actuaries.
I left because I could no longer stand to watch any more employees
get screwed out of benefits due to flaws in ERISA affecting the
traditional defined benefit pension plans. These flaws first began to
be exploited beginning in the early 1980s, and the problems have
never been fixed. Laws and regulations keep getting passed which try
and deal with the symptoms of the problem without ever dealing with
the problem itself, driving more nails in the coffin of the DB system.
I first became aware of the full extent of what cash balance plans
were doing to people when I read a front page article in the Wall
Street Journal by Ellen Schultz a few years ago. From information
from prior Enrolled Actuaries (EA) Meetings, she cited specific
actuaries as having pulled the wool over plan participants eye's with
these conversions, and then laughing about it.
I have thoroughly investigated it, including getting some old EA
Meetings transcripts out and reading the sessions on CB plans. These
were before the national notoriety of these systems became known, so
the actuaries speak openly, believing no one will ever know what they
are discussing behind closed doors.
***
I believe that most cash balance pension plans are illegal, violating
both ADEA, The Age Discrimination in Employment Act, as well as
certain technical provisions of our highly complex pension laws.
Those who orchestrated them are immoral and unethical.
These proposed regulations supposedly fixing the CB problems do not.
Instead, they perpetuate them.
Moreover, you cannot fix them without major league pension reform of
the underlying flawed laws. This should not be left up to staff
writers of regulations, as it will take outside expertise and
considerable time. Rather Congress needs to do it in an open and
fully transparent forum where the public can see what our elected
representatives are doing--much like what happened back in 1974 when
ERISA was constructed. Then we did not have the technology to check
on what is going on, or to provide input, as we do now.
CB plans have been done by more than 300 corporations, a veritable
Who's Who of American giants. They have destroyed the retirement
prospects of several million people, many of them older employees who
have little prospect of recovery. Many individuals have seen their
pension benefits reduced by as much as 75%. The aggregate losses are
staggering--well into the many tens of billions of dollars in
benefits that companies have reneged. There are literally hundreds of
ongoing lawsuits and hundreds of thousands, if not millions, of
complaints to various government agencies and members of Congress.
Most CB plans were done surreptitiously, often with misleading or
inadequate communications, without giving employees adequate personal
information upon which to make appropriate decisions involving a lot
of money, that is, when they give employees any choice at all.
There is a reason for this. They cannot do this openly and honestly
without an open rebellion by the workforce.
***
Here is what they do.
First, they screw older participants two ways:
1. They remove the early retirement subsidy right before retirement
in many cases--something that can easily be worth as much to a
participant as the normal retirement benefit. This is one of those
two major flawed ERISA laws. I notice that the proposed regulations
continue to permit this; and
2. They reduce or eliminate future benefit accruals sharply, which
again, due to the other major ERISA flaw, had a worth--a present
value--that is extremely backloaded, and thus can easily be worth 50%
of an employees total career benefit. The proposed regulations do
little to fix this.
However, they also screw younger employees by converting the plan
from a final-pay related pension plan to a career-pay one. This
reduces the future benefit by 40% of more.
They do this by the old time-honored twin financial slight-of-hand,
relying on the average employee's ignorance of both historical asset
class returns and the powerful importance of compound interest.
They credit the hypothetical employee accounts with absurdly low
interest, Treasury Bill Rates or those plus 1% or so. Historically, T-
Bill rates have been from 0.5 to1.0% above inflation, or since 1926,
about 3.5 to 4.0% per year. This is not nearly high enough to get a
decent retirement benefit.
Importantly, the typical large DB plan has earned well over 9% for
the last two decades--and this is after the recent debacle in the
stock market. Pension actuaries typically use long term expected
rates in that vicinity in their pension calculations. An increase of
one percent can reduce plan costs by 15%.
The combination means that employers are making lots of dough from
the misery of their own employees. It also means the typical annual
pay rate credits of say 4-5% on these hypothetical accounts costs
considerably less to the employer that that. Just another way to
flimflam the workforce.
Yes, they do increase slightly, the amount of the present value a
younger employee gets should he terminate, but it is of short
duration. However, typically it does not take long before the new
amounts are less than the old plan (because of the switch to a career
pay plan). Also, please keep in mind that the old plan had this awful
backloading of the present values to begin with.
The way sponsors have done CB plans is awful for plan participants,
both older and younger employees and awful for corporations and their
shareholders too, in the long term. They are also terrible for
America and it's economy. They can rightly be termed a major swindle,
with serious consequences for the nation.
***
Ironically, however, done right they can fix the seriously flawed
tontine-like flawed laws that have existed in ERISA since 1974, and
which have cost defined benefit pension plan participants over one
trillion dollars to date. That makes these flaws, including CB plan
conversions, the source of the largest single financial scandal in US
history. It is a full five times the one in second place, the S&L
scandal of the 1980s, and more than 30 times the Enron bankruptcy.
Pension consulting actuaries working for a handful of the very large
management consulting firms that dominate the actuarial and human
resource consulting for Fortune 1000 companies, are the ones that
have orchestrated these plans. Specifically these are Enrolled
Actuaries who legally are supposed to be working on behalf of plan
participants in doing the annual actuarial valuation work, but by
extension, they also do all of the design work for these plans.
The conflicts of interest they have are every bit as great as those
in the recent accounting scandals and account for why these things
have occurred. For example, the management consulting firms they work
for also do Executive Compensation. Indeed the wildly excessive
compensation for American CEOs began in that industry. They also have
the benefit communication services that are often used to flimflam
the employees during these complicated CB conversions. Sometimes
those communication services also are used to make sure that selected
key senior executives are made whole once the CB conversions slash
their retirement benefits.
I do not intend to let them off the hook, nor those who have assisted
them.
There has been a pension revolution taking place over the past 5
years or so, led by seniors who have become fed up with these rip-
offs, and begun by IBM employees who helped create the Internet. The
emergence of internet technology permits angry citizens to overcome
time and distance to band together, talk about and learn what took
place, and those who have been doing bad things had better understand
that.
In this regard, CB plans go all the way back to 1985 when Bank
America first put one in. After being in legal controversy and limbo
for many years, in the early 90s, an insider in the IRS sent an
unauthorized memo out 'permitting' CB plans to go forward. They
proliferated after that.
Let the word go forth, that this kind of nonsense is no longer going
to be possible without everyone knowing about it.
I am pleased to be a part of that revolution.
***
At the time ERISA was created in 1974, it followed several years of
huge pension scandals with thousands of people descending on
Congress. It was the largest set of laws ever enacted and took
several years to do. While it was a good initial effort, those laws
need serious revision, as parts of them have been exploited big time.
If we fix them right, we can also do vast simplification. This can
mean that defined benefit pension plans can grow again, as opposed to
declining, as they have been for two decades.
Defined benefit pension plans, after all, when done right, are the
most efficient way to deliver pension benefits to large groups of
people so that no one gets left behind--far better than defined
contribution plans. They are also far and away the least expensive--
more than 40% cheaper than defined contribution plans, for example--
due to the higher returns professional money managers get, and the
much smaller investment fees.
Also the money's invested typically are more efficiently employed
economically, than say individual investors, the former usually using
investment practices and techniques that cannot possibly be employed
by the vast majority of individuals. They do not have affordable
access to them, much less have the time and knowledge to master their
intricacies, nor can they accept the risk that goes along with them.
As part of that process, we need to reform the IRS funding rules, as
well as the pension accounting rules. Both of these have served to
help create some of the Enron type scandals we are all so familiar
with.
In reforming ERISA first, I believe we can also make the accounting
rules more similar to the funding ones, including some key actuarial
assumptions--and wouldn't that be a win-win for everyone concerned?
***
Here are a few additional thoughts:
1. The present value of accrued benefit backloading problems
affecting both normal retirement and early retirement need fixing.
You do this by replacing Act Sec 204(b)(1) and Act Sec.1012(a) of
ERISA (IRS Code Sec. 411(b)(1)(a)-(C) ) with a new section that
removes this awful backloading of the present values and replaces it
with one that makes the accrued benefit equal to the deferred annual
annuity one gets from using the past service liability at any point
in time under the Entry Age Normal Actuarial Cost Method (EANACM) and
converting it using the identical assumptions used in the Method
itself. Do the same thing for the early retirement benefit, including
any early retirement subsidy. This levels out the present values,
dividing both the normal retirement and the early retirement benefits
in the exact fair manner between the past and the future service.
This would be in accordance with pay, if it is a pay related formula,
or in accordance with service if it is not, thus fixing the
backloading problem. It is the only mathematically correct and fair
way to do it. Also remove the section 401(h) which allows 'surplus'
to be siphoned off from the plan and used for health purposes.
Plan 'surplus' is not surplus in the sense that it is not necessary.
It is a natural part of the actuarial funding process and taking it
weakens the future viability of the plan.
2. Enrolled pension actuaries have great ERISA responsibilities. It
is time we held them accountable. Some of the main things to do in
this regard are:
a. Make the IRS required annual actuarial valuation report public
and readily accessible online. The Schedule B of Form 5500 does not
come even close to cutting it. Make sure it is complete also, not
truncated as is sometimes done for unions, and make sure it also
contains the accounting calculations (presently the FAS 87 /FAS 88
calculations) and not just the IRS minimum funding requirement
calculations.
b. Eliminate five of the six permissible IRS actuarial cost methods,
retaining only the one that makes the most sense: The Entry Age
Actuarial Cost Method. Would you permit accountants to have six GAAP
methodologies to select from in doing their annual financial
statements?
c. Require that the Enrolled Actuary append to the annual actuarial
valuation report brief summaries of how they arrived at each key
actuarial assumption and, if any changes are made from the prior
year, why.
d. Require that the EA get from the plan sponsor a summary of the
long-term investment strategy and asset allocation. The EA must then
explain how this strategy was used, along with the plan's actual
investment experience, in arriving at the long-term investment
assumption used for both IRS minimum funding and for pension expense.
e. Require that each actuarial assumption be individually realistic--
no offsetting assumptions should be permissible. This is the computer
age, remember?
f. If the plan offers a lump sum, the EA must show how he lowered the
long-term interest assumption to account for the shorter time horizon
for investments.
3. Ask the FASB to revise FAS 87 and 88 in light of the above and in
the simplified IRS funding rules which should be part of the
revisions in 5 below. For example, ask that they change the actuarial
cost method currently used for pension expense under FAS 87 from the
Projected Unit Credit to the Entry Age Normal; use a similar
methodology for pension expense as is used for IRS funding purposes;
require that the long-term interest assumption used for calculating
pension liabilities for funding be the one also used for calculating
similar pension liabilities for expense purposes (replacing
the 'discount rate'); make sure there are no loopholes allowing plan
sponsors to recapture pension surplus of otherwise harm plan
participants during corporate reorganizations or
acquisition/divestitures.
4. Make sure that adequate annual detailed and individualized
disclosure is provided for each participant. This includes the amount
of the pension at normal and early retirement and at other relevant
points during his career and the amount of lump sums if that is
offered. If a plan change occurs, a similar detailed statement must
be provided showing the before and after situation. The only
exception would be if the Plan Administrator can certify that the
participant has not been materially affected.
5. Simplify the pension laws and regulation. This should be able to
be done in a major way because of the foregoing changes. Massive
rules and relations have been passed for two decades that complicated
things and never addressed or corrected the basic underlying
problems. It is the major carrot for doing the foregoing things.
***
I will not be available for the April 10 public hearings on these
proposed regulations as I will be in Italy on vacation. However, I
would be pleased to meet with any group after I return.
One last thing.
I also know what is wrong with the other major defined benefit
systems, all of them also failing: Social Security, Medicare and
retiree medical plans.
None of these systems are true DB plans, lacking both actuarial
advance funding and strong laws with teeth to protect the plan assets
and the accrued benefit of workers.
Actuarial advance funding not only makes demographic changes a
relatively minor element, but also in time will lower the costs by
two-thirds and they will be very stable too.
It will also be great for the economy and help create major oversight
to prevent corporate malfeasance. In fact these changes might just
save capitalism and with it, democracy.
Actuarial advance funding was invented in 1916 by the first
consulting actuary, George Buck, and has been widely and successfully
used all this time. In fact Congress finally required that it be used
but alas only for all corporate defined benefit pension plans in 1974
with ERISA.
The same reasons for using it in 1916 apply today for all DB plans,
even retiree medical ones.
Perhaps we can talk about that too.
In the meantime you might want to read my posts on all of these
issues on the Society of Actuaries forum, http://www.soa,org.
They go into this in far more detail.
Sincerely,
Andrew C. Lang FSA, MAAA
1426 Springton Lane
West Chester, PA 19380
610-738-678
andylang@e...
Here is your chance to speak up. Although the time deadline for comments is now over, you can still write your congresspeople.
I'm off to Italy! (almost anyway)
March 13, 2003
Internal Revenue Service
POB 7604
CC: ITA: RU (Reg-209500-86, Reg-164464-02), RIN 1545-BA10, 1545-BB79
Ben Franklin Station
Washington, DC 20044
Dear Sir or Madam:
My name is Andy Lang and I am a pension actuary. I am a Fellow of
The Society of Actuaries (FSA) and a Member of the American Academy
of Actuaries (MAAA). My comments here, however, are solely my own.
I have more than 40 years of actuarial experience, most of it as a
pension actuary, from the beginnings of their great growth period,
1961 to 1980, to the beginnings of their current-day near collapse,
in the 1980s.
I left the pension consulting industry in 1990, as a Principal
(shareholder) at Towers Perrin, then the world's largest management
consulting firm in the world specializing in human resources, and the
largest single employer of actuaries.
I left because I could no longer stand to watch any more employees
get screwed out of benefits due to flaws in ERISA affecting the
traditional defined benefit pension plans. These flaws first began to
be exploited beginning in the early 1980s, and the problems have
never been fixed. Laws and regulations keep getting passed which try
and deal with the symptoms of the problem without ever dealing with
the problem itself, driving more nails in the coffin of the DB system.
I first became aware of the full extent of what cash balance plans
were doing to people when I read a front page article in the Wall
Street Journal by Ellen Schultz a few years ago. From information
from prior Enrolled Actuaries (EA) Meetings, she cited specific
actuaries as having pulled the wool over plan participants eye's with
these conversions, and then laughing about it.
I have thoroughly investigated it, including getting some old EA
Meetings transcripts out and reading the sessions on CB plans. These
were before the national notoriety of these systems became known, so
the actuaries speak openly, believing no one will ever know what they
are discussing behind closed doors.
***
I believe that most cash balance pension plans are illegal, violating
both ADEA, The Age Discrimination in Employment Act, as well as
certain technical provisions of our highly complex pension laws.
Those who orchestrated them are immoral and unethical.
These proposed regulations supposedly fixing the CB problems do not.
Instead, they perpetuate them.
Moreover, you cannot fix them without major league pension reform of
the underlying flawed laws. This should not be left up to staff
writers of regulations, as it will take outside expertise and
considerable time. Rather Congress needs to do it in an open and
fully transparent forum where the public can see what our elected
representatives are doing--much like what happened back in 1974 when
ERISA was constructed. Then we did not have the technology to check
on what is going on, or to provide input, as we do now.
CB plans have been done by more than 300 corporations, a veritable
Who's Who of American giants. They have destroyed the retirement
prospects of several million people, many of them older employees who
have little prospect of recovery. Many individuals have seen their
pension benefits reduced by as much as 75%. The aggregate losses are
staggering--well into the many tens of billions of dollars in
benefits that companies have reneged. There are literally hundreds of
ongoing lawsuits and hundreds of thousands, if not millions, of
complaints to various government agencies and members of Congress.
Most CB plans were done surreptitiously, often with misleading or
inadequate communications, without giving employees adequate personal
information upon which to make appropriate decisions involving a lot
of money, that is, when they give employees any choice at all.
There is a reason for this. They cannot do this openly and honestly
without an open rebellion by the workforce.
***
Here is what they do.
First, they screw older participants two ways:
1. They remove the early retirement subsidy right before retirement
in many cases--something that can easily be worth as much to a
participant as the normal retirement benefit. This is one of those
two major flawed ERISA laws. I notice that the proposed regulations
continue to permit this; and
2. They reduce or eliminate future benefit accruals sharply, which
again, due to the other major ERISA flaw, had a worth--a present
value--that is extremely backloaded, and thus can easily be worth 50%
of an employees total career benefit. The proposed regulations do
little to fix this.
However, they also screw younger employees by converting the plan
from a final-pay related pension plan to a career-pay one. This
reduces the future benefit by 40% of more.
They do this by the old time-honored twin financial slight-of-hand,
relying on the average employee's ignorance of both historical asset
class returns and the powerful importance of compound interest.
They credit the hypothetical employee accounts with absurdly low
interest, Treasury Bill Rates or those plus 1% or so. Historically, T-
Bill rates have been from 0.5 to1.0% above inflation, or since 1926,
about 3.5 to 4.0% per year. This is not nearly high enough to get a
decent retirement benefit.
Importantly, the typical large DB plan has earned well over 9% for
the last two decades--and this is after the recent debacle in the
stock market. Pension actuaries typically use long term expected
rates in that vicinity in their pension calculations. An increase of
one percent can reduce plan costs by 15%.
The combination means that employers are making lots of dough from
the misery of their own employees. It also means the typical annual
pay rate credits of say 4-5% on these hypothetical accounts costs
considerably less to the employer that that. Just another way to
flimflam the workforce.
Yes, they do increase slightly, the amount of the present value a
younger employee gets should he terminate, but it is of short
duration. However, typically it does not take long before the new
amounts are less than the old plan (because of the switch to a career
pay plan). Also, please keep in mind that the old plan had this awful
backloading of the present values to begin with.
The way sponsors have done CB plans is awful for plan participants,
both older and younger employees and awful for corporations and their
shareholders too, in the long term. They are also terrible for
America and it's economy. They can rightly be termed a major swindle,
with serious consequences for the nation.
***
Ironically, however, done right they can fix the seriously flawed
tontine-like flawed laws that have existed in ERISA since 1974, and
which have cost defined benefit pension plan participants over one
trillion dollars to date. That makes these flaws, including CB plan
conversions, the source of the largest single financial scandal in US
history. It is a full five times the one in second place, the S&L
scandal of the 1980s, and more than 30 times the Enron bankruptcy.
Pension consulting actuaries working for a handful of the very large
management consulting firms that dominate the actuarial and human
resource consulting for Fortune 1000 companies, are the ones that
have orchestrated these plans. Specifically these are Enrolled
Actuaries who legally are supposed to be working on behalf of plan
participants in doing the annual actuarial valuation work, but by
extension, they also do all of the design work for these plans.
The conflicts of interest they have are every bit as great as those
in the recent accounting scandals and account for why these things
have occurred. For example, the management consulting firms they work
for also do Executive Compensation. Indeed the wildly excessive
compensation for American CEOs began in that industry. They also have
the benefit communication services that are often used to flimflam
the employees during these complicated CB conversions. Sometimes
those communication services also are used to make sure that selected
key senior executives are made whole once the CB conversions slash
their retirement benefits.
I do not intend to let them off the hook, nor those who have assisted
them.
There has been a pension revolution taking place over the past 5
years or so, led by seniors who have become fed up with these rip-
offs, and begun by IBM employees who helped create the Internet. The
emergence of internet technology permits angry citizens to overcome
time and distance to band together, talk about and learn what took
place, and those who have been doing bad things had better understand
that.
In this regard, CB plans go all the way back to 1985 when Bank
America first put one in. After being in legal controversy and limbo
for many years, in the early 90s, an insider in the IRS sent an
unauthorized memo out 'permitting' CB plans to go forward. They
proliferated after that.
Let the word go forth, that this kind of nonsense is no longer going
to be possible without everyone knowing about it.
I am pleased to be a part of that revolution.
***
At the time ERISA was created in 1974, it followed several years of
huge pension scandals with thousands of people descending on
Congress. It was the largest set of laws ever enacted and took
several years to do. While it was a good initial effort, those laws
need serious revision, as parts of them have been exploited big time.
If we fix them right, we can also do vast simplification. This can
mean that defined benefit pension plans can grow again, as opposed to
declining, as they have been for two decades.
Defined benefit pension plans, after all, when done right, are the
most efficient way to deliver pension benefits to large groups of
people so that no one gets left behind--far better than defined
contribution plans. They are also far and away the least expensive--
more than 40% cheaper than defined contribution plans, for example--
due to the higher returns professional money managers get, and the
much smaller investment fees.
Also the money's invested typically are more efficiently employed
economically, than say individual investors, the former usually using
investment practices and techniques that cannot possibly be employed
by the vast majority of individuals. They do not have affordable
access to them, much less have the time and knowledge to master their
intricacies, nor can they accept the risk that goes along with them.
As part of that process, we need to reform the IRS funding rules, as
well as the pension accounting rules. Both of these have served to
help create some of the Enron type scandals we are all so familiar
with.
In reforming ERISA first, I believe we can also make the accounting
rules more similar to the funding ones, including some key actuarial
assumptions--and wouldn't that be a win-win for everyone concerned?
***
Here are a few additional thoughts:
1. The present value of accrued benefit backloading problems
affecting both normal retirement and early retirement need fixing.
You do this by replacing Act Sec 204(b)(1) and Act Sec.1012(a) of
ERISA (IRS Code Sec. 411(b)(1)(a)-(C) ) with a new section that
removes this awful backloading of the present values and replaces it
with one that makes the accrued benefit equal to the deferred annual
annuity one gets from using the past service liability at any point
in time under the Entry Age Normal Actuarial Cost Method (EANACM) and
converting it using the identical assumptions used in the Method
itself. Do the same thing for the early retirement benefit, including
any early retirement subsidy. This levels out the present values,
dividing both the normal retirement and the early retirement benefits
in the exact fair manner between the past and the future service.
This would be in accordance with pay, if it is a pay related formula,
or in accordance with service if it is not, thus fixing the
backloading problem. It is the only mathematically correct and fair
way to do it. Also remove the section 401(h) which allows 'surplus'
to be siphoned off from the plan and used for health purposes.
Plan 'surplus' is not surplus in the sense that it is not necessary.
It is a natural part of the actuarial funding process and taking it
weakens the future viability of the plan.
2. Enrolled pension actuaries have great ERISA responsibilities. It
is time we held them accountable. Some of the main things to do in
this regard are:
a. Make the IRS required annual actuarial valuation report public
and readily accessible online. The Schedule B of Form 5500 does not
come even close to cutting it. Make sure it is complete also, not
truncated as is sometimes done for unions, and make sure it also
contains the accounting calculations (presently the FAS 87 /FAS 88
calculations) and not just the IRS minimum funding requirement
calculations.
b. Eliminate five of the six permissible IRS actuarial cost methods,
retaining only the one that makes the most sense: The Entry Age
Actuarial Cost Method. Would you permit accountants to have six GAAP
methodologies to select from in doing their annual financial
statements?
c. Require that the Enrolled Actuary append to the annual actuarial
valuation report brief summaries of how they arrived at each key
actuarial assumption and, if any changes are made from the prior
year, why.
d. Require that the EA get from the plan sponsor a summary of the
long-term investment strategy and asset allocation. The EA must then
explain how this strategy was used, along with the plan's actual
investment experience, in arriving at the long-term investment
assumption used for both IRS minimum funding and for pension expense.
e. Require that each actuarial assumption be individually realistic--
no offsetting assumptions should be permissible. This is the computer
age, remember?
f. If the plan offers a lump sum, the EA must show how he lowered the
long-term interest assumption to account for the shorter time horizon
for investments.
3. Ask the FASB to revise FAS 87 and 88 in light of the above and in
the simplified IRS funding rules which should be part of the
revisions in 5 below. For example, ask that they change the actuarial
cost method currently used for pension expense under FAS 87 from the
Projected Unit Credit to the Entry Age Normal; use a similar
methodology for pension expense as is used for IRS funding purposes;
require that the long-term interest assumption used for calculating
pension liabilities for funding be the one also used for calculating
similar pension liabilities for expense purposes (replacing
the 'discount rate'); make sure there are no loopholes allowing plan
sponsors to recapture pension surplus of otherwise harm plan
participants during corporate reorganizations or
acquisition/divestitures.
4. Make sure that adequate annual detailed and individualized
disclosure is provided for each participant. This includes the amount
of the pension at normal and early retirement and at other relevant
points during his career and the amount of lump sums if that is
offered. If a plan change occurs, a similar detailed statement must
be provided showing the before and after situation. The only
exception would be if the Plan Administrator can certify that the
participant has not been materially affected.
5. Simplify the pension laws and regulation. This should be able to
be done in a major way because of the foregoing changes. Massive
rules and relations have been passed for two decades that complicated
things and never addressed or corrected the basic underlying
problems. It is the major carrot for doing the foregoing things.
***
I will not be available for the April 10 public hearings on these
proposed regulations as I will be in Italy on vacation. However, I
would be pleased to meet with any group after I return.
One last thing.
I also know what is wrong with the other major defined benefit
systems, all of them also failing: Social Security, Medicare and
retiree medical plans.
None of these systems are true DB plans, lacking both actuarial
advance funding and strong laws with teeth to protect the plan assets
and the accrued benefit of workers.
Actuarial advance funding not only makes demographic changes a
relatively minor element, but also in time will lower the costs by
two-thirds and they will be very stable too.
It will also be great for the economy and help create major oversight
to prevent corporate malfeasance. In fact these changes might just
save capitalism and with it, democracy.
Actuarial advance funding was invented in 1916 by the first
consulting actuary, George Buck, and has been widely and successfully
used all this time. In fact Congress finally required that it be used
but alas only for all corporate defined benefit pension plans in 1974
with ERISA.
The same reasons for using it in 1916 apply today for all DB plans,
even retiree medical ones.
Perhaps we can talk about that too.
In the meantime you might want to read my posts on all of these
issues on the Society of Actuaries forum, http://www.soa,org.
They go into this in far more detail.
Sincerely,
Andrew C. Lang FSA, MAAA
1426 Springton Lane
West Chester, PA 19380
610-738-678
andylang@e...