While You Weren't Looking....

Timing is everything. It is used by the most strategic communicators to insure their message doesn’t hit a busy news day and is drowned out by other stories. Johnson & Johnson’s announcement Thursday that they are suspending their defined benefit pension plan for employees who join the firm after January 1, 2015 was a timed release. Thursday was September 11, Patriot’s Day in the United States and a day of remembrance when the news media, even the business media was focused on what happened in America thirteen years ago. It was the perfect day for the world’s biggest maker of health care products to release that news to media. On September 10, J&J management presented a rosy, yet cautious picture at the Morgan Stanley Health Care Conference. On September 11 you tell your workforce the pension plan won’t be there for your kids when you get them hired. Timing.

So, this is the part of the blog post, where I share in full transparency that I am an early retiree of J&J. At this point, I know from the scant news coverage this story garnered, that current retirees (like me) and active employees are not impacted. This action is for new hires and re-hires after 1/1/2015, I know that because I read it on the Internet. I probably have a letter coming from J&J’s benefit service center’s HQ in Lincolnshire, IL explaining I am not impacted at all. That letter hasn’t arrived yet. Timing.

I am certainly not surprised J&J’s defined benefit plan went away. I came to work for the company primarily because they offered the plan. In my 21 years of work prior to joining the health care giant my previous employers only offered 401(k) or defined contribution plans. In 401(k) plans you pay and the company matches. In defined benefit (DB) plans, the company pays 100% and you are guaranteed* a set amount for life or in J&J’s plan design until you are 90-years-old. I’ll figure out what to about 90 to death when I get there. According to a report by Towers Watson, an employee benefit consulting firm, about 24% of Fortune 500 companies offer “DB” plans to new hires in a considerable decline over the years.

Hopefully, you read the previous blog post: Pension Smoothing, Potholes & Pork. I highly recommend it.  

http://workinglater.blogspot.com/2014/09/pension-smoothing-potholes-and-pork.html

DB plans are notorious for being underfunded (aka not having enough money to pay the amount of money owed). J&J is no different. From a J&J public website on strategic framework—oh forget it, I’ll just let corporate communications speak for themselves:

“At the end of fiscal year 2012, the projected benefit obligation was $21,829 million, and the fair value of the assets equaled $17,536 million, for a shortfall of $4,293 million. Discretionary contributions are made when deemed appropriate to meet the plan’s long-term obligations. For more information, see Note 10 in our 2012 10-K Annual Report.”

All I know is when I do get ready to tap into my DB money, I hope there is a big pile of cash with my name on it and the plan is not “short” (aka underfunded, broke, busted…). Timing.

Pension Smoothing, Potholes and Pork

Generally I keep politics out of this blog. Then I heard about pension smoothing. It is the latest sleight of hand trick in government and don’t worry, it is equally loved by all political parties and even many labor unions. On the surface it appears to be a victimless maneuver only affecting the millions of people counting on a future pension payment from American companies. So, what is pension smoothing?

Simply put, pension smoothing allows companies to defer making mandatory contributions to defined benefit pensions plans in order to use that money for any reason they choose. Pension smoothing was added to a recent transportation bill that covers repairs to highways, bridges and subways saving the Highway Trust Fund from bankruptcy. Just to make the entire situation more complicated, in addition to funding the highway work, this bill also saves 700,000 American jobs.

Here’s the risk: To solve the short-term issues of maintaining the nation’s road infrastructure; companies do not have to fully fund their pension plans which may mean more plans won’t have the money to meet their obligations to pensioners later. According to a survey by Pensions & Investments, a money management newspaper, the largest 100 U. S. pension plans were underfunded by $122.3 billion in 2013 and that was an improvement!

Companies today put much of the retirement burden on the employees by focusing on 401(k) plans where workers cobble together a DIY strategy to save for the future. However, there are millions of employees counting on employer-paid defined benefit plan payouts for at least a portion of their wealth when they are too old to work. Pensions are in trouble as city and municipal workers in Detroit, Stockton, CA along with Pennsylvania school districts and other public employees across the country realize. Private sector pensions are no better as the retirees of Hostess Brands, who bring us Wonder Bread, Twinkies and other goodies, learned in 2012 when the company filed bankruptcy. The PBGC, Pension Benefit Guaranty Corporation, a government agency had to step in and rescue their plan.

The concept of the PBGC is itself an oxymoron. The same Congress that is encouraging companies to delay funding their pensions has a safety net for 44 million workers covered by defined-benefit private pension plans, the PBGC. When private sector firms cannot meet their liability, the PBGC pays an amount less than the company-promised benefit, but it is something. The problem is that in their July 3, 2014 annual report, the PBGC says it is “90% likely to run out of funds in 2025.” The biggest birth year of Baby Boomers will be 68-years-old in 2025 with plenty of life ahead of them, but maybe not as many job prospects.