By Bruce Shutan
Members of the so-called “greatest generation” freed the world from fascism and enjoyed the opportunity to relay those gritty war stories in retirement. But their children and grandchildren may not be so lucky.
“People should be saving at least 10% of their income,” Derek Dingle, a member of the advisory board of the GE Center for Financial Learning recently told The Wall Street Journal. Trouble is, working Americans aren’t getting the message. The Department of Commerce’s Bureau of Economic Analysis recently published a downward revision in the nation’s personal savings rate between 1990 and 2002. The latest available figure shows that the savings rate as a share of disposable income was just 2.3%.
Young people obviously don’t think much about retirement savings because their focus is on the present, while older workers realize the need for an income source later in life. It’s a social dynamic that has been seen throughout the life of Tom Zimmerman, executive administrative director of the Motion Picture Industry Pension & Health Plans (MPIPHP).
“Some people no doubt mortgage themselves in their earlier years,” he says. “When we have our retirement seminars during the year, we do our best to emphasize the need to save, but it’s a tough message for someone who’s really young.”
All vested participants in the MPIPHP have access to both a traditional “defined benefit” (DB) pension as well as a modern-style “defined contribution” (DC) plan (known as an Individual Account Plan) that is solely funded by contributing employers and cashed out at retirement.
Unlike 401(k) plans in which the employer and employee make contributions, the IAP features only employer dollars amounting to 30.5 cents for every credited hour of work under the collective bargaining agreement as well as a percentage of compensation that varies across all 31 union locals in the motion picture and television production community.
The IAP was created to supplement the DB pension, whose contribution levels were increased 7.5% to 15% for active workers as of August 1, 2003 when the current collective bargaining agreement took effect. Unlike many traditional DB plans whose formulas are tied to final average pay usually in the last three to five years of an individual’s career, the first 10,000 work hours for MPIPHP participants are valued at a monthly rate of 2.95 cents per hour and 3.93 per hour for the 11th and subsequent qualified years (before applying the new increase).
Pension increases that are granted under collective bargaining agreements are protected by law and cannot be taken away. “When you read about some pension plans cutting back the amount of the benefit, they’re doing it prospectively and not historically,” according to Zimmerman.
Karen Ferguson, president of the Pension Rights Center in Washington, D.C., considers MPIPHP participants “very fortunate, since the trend has been for traditional pensions to cut back on future payments rather than increase them.” She notes that DB plans provide far greater security than other funding vehicles because they’re not only funded by employers but also offer a lifetime stream of payments, as well as protections for widows and widowers.
“More important,” she adds, “most benefits paid by defined benefit plans are fully guaranteed by the federal government’s pension insurance program.”
But the nation’s retirement safety net is fraying. There has been a steady decrease in the number of DB plans. The Employee Benefit Research Institute (EBRI) in Washington, D.C., has conducted research that shows the number of DB plans falling to 36,000 in 2002 from 56,000 in 1998. Assets in the more popular DC-style plans have swelled to nearly $2 trillion today from $74 billion in 1975, while DB plan assets have risen to nearly $1.6 trillion from $186 billion—a gap industry insiders expect to grow.
EBRI also confirms an alarming trend in which DB plan participants are being given lump-sum distributions when they leave their employer rather than the traditional annuity-based pensions—in effect making future generations of workers more responsible for planning their own retirement.
It’s a harrowing scenario considering the institute’s latest retirement-confidence survey found that 61% of workers say they haven’t determined how much they’ll need to save to afford retirement, while 36% of those who claim to have done the calculation do not know or remember the results. And if current patterns continue, EBRI warns that by 2030 there will be at least a $45 billion annual shortfall in the amount retired Americans need to cover basic expenses. Although the amount of money people need to salt away for their golden years hinges on multiple variables, many financial experts believe the figure could be as high as $1 million given today’s higher life expectancy.
Prospects for improving pension benefits have declined in recent years, with the Bureau of National Affairs’ latest annual survey of employer bargaining objectives showing 32% of respondents willing to raise benefit levels in 2003 compared with 48% the previous year. DB plans in collectively bargained environments still far outweigh DC plans (68% to 31%), according to the survey, while 22% said they offered both types of plans.
As Ferguson suggested, MPIPHP participants are in an elite group. Others include some 24,000 members of 14 General Electric unions that recently inked a four-year pact under which long-service employees will see their pensions rise by as much as 35%, while early-retirement windows will open for more than 1,000 workers, which is up from 850 for union and non-union employees alike.
Fortune also has shined on legions of retirees in the Motor City whose union leadership spent years bargaining aggressively for retirement security. Zimmerman notes that General Motors recently floated a $13 billion bond offering, most of which had to finance the automaker’s massive pension benefit obligations.
Indeed, GM pumped $4.8 billion into its pension and earmarked another $1 billion to cover retiree health care expenses at a time when the federal government estimates that two-thirds of Americans age 65 and older have no employer-sponsored medical coverage. GM pension payments average $14,000 a year, which is more than double the median income from private pensions in the U.S.
The news couldn’t be worse for consumers. With the automaker’s retirees and surviving spouses outnumbering active employees in the U.S. nearly 3 to 1, it’s no wonder pension and health care costs add about $1,400 to the price tag of every car GM builds. A similar scenario could unfold in Hollywood. EBRI President and CEO Dallas Salisbury suggested in the first part of this series that the “extraordinarily generous provisions” of the MPIPHP benefits package could “absolutely assure moviegoers will be paying higher ticket prices in the future.”
One of his pet peeves is the long-term funding horizon used for the production community’s pension, but the issue isn’t cut and dried. For example, assets in the MPIPHP pension actually exceed vested benefits because trustees accelerated by 10 years the federally mandated 30-year funding requirement, which is used along with complex actuarial tables to project retirement benefit payouts for each retiree.
Why so? “The bargaining parties and subsequently pension-plan board of trustees wanted to ensure the money was there when folks retire,” Zimmerman says, praising their foresight. “If a promise is made, a promise has got to be kept.”
Although pension increases won’t be phased in until early 2006, catch-up pensions payments will be retroactive for anyone who retires between August 1, 2003 and that time so that none of the new retirees will miss out on the additional benefits.
Salisbury believes MPIPHP plan participants should be asking tough questions about the funding of their DB plan and implications of spreading it over such a substantial period of time vs. full funding of the plan on a current year-by-year basis or the life of the contract. “One of the reasons plans in a number of industries have gotten into trouble is because they have used funding approaches over many years,” he says, warning against “following the steel companies into oblivion.”
But his suggestion would place “such an extreme funding requirement that there would be less money available for benefit increases,” according to Zimmerman. The longer-term funding timeline associated with the defined benefit pension plan reflects a staunch belief that the entertainment industry’s future is expected to be a bright one.
“We’re not the steel industry nor will we be obsolete from technology or environmental changes,” he notes.
Ferguson frames the issue in a much larger context: “Faster funding, of course, is preferable, but a great attraction of defined benefit plans for employers has been that they can be funded over long periods of time. If there were a requirement of faster funding, fewer employers would be willing to join these plans.”
Ahead of market
In recent years, MPIPHP retirement vehicles rode out the worst of the bear market and recovered nicely in 2003. “We’re very much diversified, investing in U.S. and international companies of all sizes and industries,” Zimmerman reports. “We don’t put all our eggs in one basket. That could be fatal.”
He says the two plans outperformed all major benchmark indices through the latest bear market, with both nearly breaking even in 2001 and losing roughly 9% apiece in 2002 but rebounding in 2003 with investment earnings of about 22.5% and 19.5%, respectively, for the pension and IAP. “We’re very proud of that fact and it confirms the finance committee of the board’s investment allocation is working,” he opines.
Professional money managers have chosen for the traditional pension plan a prudent blend of equity (52%), fixed-income (42%), real estate and other investments (6%). The IAP mix slightly favors fixed-income securities—a deliberate move, considering most participants cash out these assets upon retirement, whereas pensions are paid in the form of an annuity that’s guaranteed for life. IAP account balances, of course, will fluctuate based on stock market performance.
During the market’s nadir, the MPIPHP stepped up communication efforts to ease anxiety and invite representatives from the Social Security Administration to speak about the importance of reviewing their annual government benefits statement. “People don’t like surprises,” Zimmerman deadpans.
Retiree health coverage
One battleground for all future labor negotiations will be bargaining for retiree medical benefits. Noting that the MPIPHP’s retiree health plan isn’t guaranteed for life, Zimmerman explains that the coverage is subject to further evaluation at the bargaining table. “It needs to be nurtured and funded,” he says, “and we all have to pay our fair share on deductibles and co-pays.”
He believes it’s incumbent upon plan managers to do everything in their power to ensure that everyone who qualifies continues to receive high-quality retiree health benefits, though acknowledging that it’s difficult to keep pace with rising medical inflation and other market forces such as years of double-digit provider rate hikes. Still, the plan is strongly positioned, with more than two years of reserves in the plan, which he considers “really impressive” in this challenging climate.
Joe Martingale, national leader for health care strategy at Watson Wyatt Worldwide in New York, cautions that medical coverage for retirees is going the way of the dinosaur.
“The cost of these programs have gotten so far out of hand that employers have felt compelled to limit or eliminate coverage, sometimes involuntarily,” he explains. “Retirees from Bethlehem Steel thought they had great coverage and learned the hard way that bankruptcy can get in the way of security.”
Research from Watson Wyatt and other leading employee benefit consulting firms shows many cutbacks began to take hold about 10 years ago in response to a controversial accounting rule requiring employers to expense these costs on their balances sheets. That’s why Martingale believes “it’s prudent to plan for things like retiree health care not being so sustainable as they are now.”
Other experts, however, believe the new Medicare prescription drug plan will help reverse the long decline in post-retirement medical plan sponsorship. One huge plus is a 28% subsidy for every dollar employers spend on prescription drugs for retirees costing between $250 and $5,000—an amount that will not be taxed.
Looking ahead, Salisbury recommends that anyone over the age of 25 check their annual Social Security benefit statement and use an online life-expectancy calculator to help determine how much money they’ll need to save for retirement. Another suggestion: review union-provided retirement benefit programs and assess how long they plan on working in the industry for a more clear retirement-savings picture. One final calculation is to determine how much income will be available to spend in retirement, which most analyses estimate at 3% of savings if the goal is not to run out of money.
Question is, what motivates young people to think about these far-off issues?
“It’s a nice simple question,” according to Salisbury. “If you’re happy to work forever, then don’t think about it. If you think you might want to retire someday, you better think about it early because a dollar saved at age 21 adds up to a whole lot more than a dollar saved at 40 or 50.”
MPIPHP participants should let it be known that they value their pension and retiree health insurance benefits as a critical component of their wage package, Ferguson suggests. She says it’s also important to send a message that they are monitoring these programs and will vigorously protest if they are scaled back in any way.
“Often cutbacks occur because employers and unions feel that their employees do not value pensions and retiree health insurance, and that they will be just as happy with far less secure employee-funded do-it-yourself retirement arrangements such as 401(k)s and medical savings accounts,” she explains. “When employees organize and protest, employers often express great surprise, and in some cases, benefits have been restored.”
Below the Line writer Bruce Shutan has been covering the employee benefits industry for 15 years. Mark London Williams, who writes the page 2 Union Roundup column for Below the Line, contributed to this report.