Corporate pension and retirement programs, the cornerstone of long-range financial planning for many workers, are changing rapidly in a changing economic and social environment.
Impelled by tax law revisions, evolving family patterns, sustained inflation and doubts about Social Security, pension managers and actuarial consultants are experimenting with new kinds of benefits.
Combinations of stock options, insurance and annuities, optional benefits and deferred compensation offer both companies and workers new flexibility in planning.
"Employers are beginning to explicitly recognize the diverse benefit needs of employes, which vary by sex, by family type, by attitudes toward saving and the ability to save," according to a report by the Employee Benefit Research Institute. "As benefit costs rise, the incentives to innovate will increase. The desire of government to shift requirements and their accompanying costs will gain momentum."
Many new programs offer workers an opportunity to choose benefit packages suited to their own needs, perhaps by foregoing salary today in exchange for a higher pension later, or giving up dental insurance in exchange for more life insurance. These programs allow workers to bypass benefits they don't need in favor of those that they do--a two-worker household, for example, may not need double medical coverage--but they also require pension trustees and labor unions to monitor developments closely to make sure benefit levels are maintained.
Most attention has been focused on flexible benefits programs known as "cafeteria plans" because they offer workers a choice of benefits. Cafeteria is "the benefits buzzword of the '80s," says Carson E. Beadle of William M. Mercer, Inc.
As adopted by several major employers, including American Can Co., TRW Inc. and the state of Alaska, these plans generally offer one minimum level of health care and life insurance benefits to all workers, while allowing the workers to add optional extras, sometimes at their own expense, or choose among several options offered by the employer.
An unmarried, childless worker, for example, might give up some life insurance coverage in exchange for extra vacation time. The male head of household in his 40s, with a stay-at-home wife and children--the person for whom most corporate benefit plans were designed, but who is now a minority in the work force--may not need deferred income for tax purposes but he does need family medical insurance.
Many actuaries and pension managers agree that rapid changes in tax laws and the demography of the work force will require still more innovation in benefit plans. So will the evolution of legal issues, such as the treatment of pension benefits as property in divorce settlements, and the inflation rate, which is forcing pension funds to pay out at a rate greater than their investments are earning.
Yet many employers have resisted pension and benefit innovation, partly because traditional male managers have not yet appreciated the changes in the work force--more women working, more single-adult households--and partly because of the high computer costs of running combination programs.
A third source of corporate resistance to flexible benefits, according to John M. Finley of Wyatt and Co., is "adverse selection." That is the trade term for a worker's decision to select the high-cost benefit he needs most. If a flexible plan provides dental coverage, for example, "a married male employe could elect dental, have his and his wife's teeth fixed, have braces put on all the children, and then drop dental the next year and take cash instead."
In pension and retirement benefits, trade sources report these developments:
* The new tax law has liberalized the rules governing Employe Stock Option Plans, known as ESOPs. In a typical ESOP, a company creates a trust fund for workers to buy company stock with money borrowed from an outside source. The corporation then pays off the loan on the workers' behalf, and the value of the stock becomes a part of their retirement benefit.
Tax breaks in the new law have stimulated many companies to initiate ESOPs as an alternative to the traditional profit sharing and as a supplement to pension funds. And experts say the number of participating firms could double to nearly 10,000 in the next three years.
One difficulty for the workers in such plans is that it ties up a major portion of the retirement benefits in a single asset. Another is that in privately-held corporations that do not report earnings, the stock could be overvalued.
* The new tax law has changed the ground rules for retirement planning by allowing individuals to set up tax-deductible retirement accounts. Savings banks, life insurance companies, and mutual funds are scrambling to attract the hundreds of millions of investment dollars that are expected to flow into new IRAs after Jan. 1.
Some corporations are contemplating a plan to assist their workers with these accounts by payroll deductions. The employers would take the money out of workers' checks and set it aside in IRAs, to be available when the workers reach the age of 59 1/2. The effect would be a substantial increase in workers' retirement benefits, with no additional cost to the employer.
* Many corporate pension programs are keyed to Social Security payments: a worker is guaranteed a certain number of dollars per month, with the company pension fund making up the difference between Social Security and the guaranteed amount. Any action to reduce or hold down Social Security benefits would drive up corporate pension costs.
* Since the vast majority of pension plans set benefit levels by the worker's salary in the last year or last few years before retirement, nationwide wage inflation is rapidly driving pension payouts upward.
Daniel F. McGinn, a California actuarial consultant, says that trend--payouts rising faster than return on pension fund investments--"can create pension funding havoc if high rates of inflation continue."
Workers who expect to retire a decade or more from now, actuaries say, should be aware that some companies may not be able to meet that pension payout obligation. Individual worker's pensions are largely guaranteed under federal law, but, according to McGinn, "because of the great numbers of past plan terminations and the fear of future trends, Congress is conducting a review of the federal government's ability to continue guaranteeing the pension benefits of terminated plans."