Adjustable pension plan still in works for Consumers Union

Consumers Union, the owner of Consumer Reports, agreed to eliminate the March 15 deadline for approval of an employment contract that includes an adjustable pension plan employees had bargained for in 2013.

Consumers Union has been waiting for plan approval from the Internal Revenue Service and had until the March 15 deadline to approve the plan. The IRS has not given its OK, but it did give approval in July 2014 of an identical plan at the New York Times, according to Bill O’Meara, president of the Newspaper Guild of New York, a union that covers news employees at both organizations.

The Consumer Reports adjustable pension plan is already operating, but it is still awaiting that last piece of the puzzle: a determination letter from the IRS that says it approves of the plan design.

“The likelihood of us getting approval by the IRS by the [contract] deadline [was slim],” O’Meara said. So Consumers Union “asked if we were interested in extending the labor contract for a year. There is new management in place at the Consumers Union. We agreed to a one-year extension with a wage increase for employees. We also got the company to eliminate the deadline. What that does is it allows us to move forward with the APP without this deadline hanging over our heads.”

He added that because the adjustable pension plan is identical to the New York Times plan, “we don’t expect a problem getting our IRS determination letter. We just don’t know when it is going to come. This allows us to operate without worrying about when it will come.”

The adjustable pension plan is a merger of a defined contribution plan with a traditional defined benefit plan. Both the employer and employees share in the risk of the plan, like a defined contribution plan, but employees don’t have individual accounts and they know that when they retire they will have a guaranteed income stream, O’Meara said.

Each year, based on the performance of the retirement plan, actuaries determine how much money each side will need to contribute to the plan the following year. That amount is based on investment, mortality, inflation and maturity risk. The good news for employers is that the amount they need to pay, once decided, stays the same for a year. It won’t adjust up by millions of dollars based on market volatility.

That means that some years will be better than others as far as their earnings go, but the APP guarantees participants will get something each year, O’Meara said. He likened the plan to a plate of pancakes. In some years, employees receive a very large pancake and, in others, a very small one. But, when they do finally retire, employees know they will have a full plate of pancakes giving them a steady stream of income in retirement.

The adjustable pension plan was developed by actuarial firm Cheiron, Inc., and the company has seen interest in its plan from other industries, including hospitality.

As part of its negotiations with Consumers Union, the Newspaper Guild of New York agreed to reduce the amount of money the company will contribute to the APP to 5% from 6%. The company agreed to put that extra 1% into the company’s nonmatching 401(k) plan instead.

“The company wanted more money going into the 401(k) because it is still a retirement vehicle. We would have preferred it all go to the APP,” O’Meara said. “As long as there was still money for employees’ retirement, we were OK with that as a quid pro quo for ending the deadline.”

The New York Times’ plan is operating as designed, he added. “We’re not hitting things out of the ballpark, but we’re not seeking to hit it out of the ballpark. It is stable. No big ups and downs. Many pension plans have a goal of 7.5% as investment return. We’re not looking for that. We’re looking for 5%. We are doing fine,” O’Meara said.

He believes the Consumer Reports plan will work the same way.

What makes the adjustable pension plan so worthwhile is that employees “will get their pension every month for the rest of their life,” O’Meara said. Actuaries determine what that monthly benefit will be so the money will last the rest of a person’s life.

“They know how important a defined benefit plan is. Even our younger members understand it. They know what it means for them. Their parents often only have a 401(k) plan. Increasingly they don’t have a defined benefit pension plan, unfortunately,” O’Meara said. “We tried to buck the trend and keep defined benefit plans in place.”

By coming up with a hybrid DC/DB option, the Cheiron-developed plan has made it “much more possible for employers to go along with it. They don’t have to worry about risk and volatility or having to make a huge payment to the plan because the stock market crashed,” he said. “It is what it is. The plan will self-adjust. If it is not a good year, the following year the pancake will be a smaller one because of the annual recalculation of what the benefit rate will be. It is a good model that gives the employer peace of mind and employees’ peace of mind for retirement.”

Source: Employee Benefit News