Got pension? Better make
By Jim Spencer, Columnist
Friday, September 2, 2005
David Cox and Bob Kolb were too polite to answer my question directly. I asked the two business professors if I was a fool for including pension payments in my retirement plan.
They both told me that direct contribution pensions - where dollars are set aside each pay period and usually transferred out of an employer's control to professional pension managers - are better than the defined-benefits pensions I'm depending on.
Defined-benefits pensions, Cox said, are based on estimates of future investment returns and estimates of employees' future earnings. Guesswork.
That's why Kolb, an assistant dean at the University of Colorado at Boulder's Leeds School of Business, always attaches the same value to defined-benefits pensions when planning his own retirement:
Seems I'm shooting craps with my future. If you want to know the stakes, see United Airlines retirees.
The courts recently let United cancel its defined-benefits pensions to bail out of bankruptcy. The law gave the company's retirees no legal recourse.
United betrayed thousands of people who devoted decades of effort to the company. If United didn't violate the law, it surely violated those employees' trust.
For guys like me, guys still na´ve enough to believe that pension plans constitute a company obligation, the warning was simple.
Caveat faber. Worker beware.
"United had two things wrong," said Cox, who teaches at the University of Denver's Reiman School of Finance. "One, their pension investments under-performed. Two, they had a heavy concentration in the pension of United stock."
Cox believes employers have an ethical obligation to have diversified pension investments in order to reduce risk.
A pension, Kolb added, "is a promise". Individual workers must determine for themselves "the quality of that promise and the ability to carry it out".
That means asking for specific information. One of the companies I'm depending on has an overfunded pension plan. The other has a broadly diversified investment portfolio. That's enough to make me believe they are spread out enough to protect me. But I still have no guarantee that I'll be able to collect.
After the collapse of Enron and WorldCom under the weight of corporate fraud, the United pension fiasco shook up plenty of folks, including me.
I talked to Kolb and Cox to test my growing cynicism that big bosses always care much more for themselves than the people who make them rich.
Case in point: While rank-and-file retirees suffer, United's senior managers still enjoy generous retirement benefits.
But it isn't just executive greed, mismanagement or fraud that can take down a pension plan, Kolb said. It can be something as out-of-your-control as the tech bust or an industry change or advances in technology.
"A buggy-whip manufacturer can promise you a pension," said Kolb, who is editing a book called "Corporate Retirement Security: Social and Ethical Issues." When cars supplant buggies, retired whipmakers are out of luck if their pensions were invested in company stock.
There's more. The collapse of the stock market after the 9/11 terrorist attacks, the rising cost of oil, the national deficit of a country whose president thinks he can fund a war and tax cuts to the rich simultaneously - these things all take a toll.
Such a toll that the Pension Benefit Guaranty Corporation estimates this country's corporate pension plans are underfunded by more than $450 billion. The PBGC, the government agency that must take over failed pension plans such as United's, is also underfunded.
As long as the government is being asked to clean up the mess, Kolb said, the law should only allow direct-contribution pensions, where the money is set aside and can't be lost.
Until that happens, America's workers need to wise up and understand defined-benefits pensions for what they are:
Promises that nobody has to keep.
Jim Spencer's column appears Monday, Wednesday and Friday. He can be reached at 303-820-1771 or email@example.com.