Big U.S. companies like GM and Verizon are paying insurance companies large sums to take over their pension plans in an effort to offload risk at a time when many defined-benefit plans are under strain. The Wall Street Journal reports:
Millions of retirees are expecting to get a company pension check for the rest of their lives. Increasingly, the name on it is likely to be an insurance company.
The reason is a growing business called pension-risk transfer, in which employers with old-fashioned pension plans, such as General Motors Co., cut deals with insurers to take responsibility for retirees’ monthly benefit.
The movement is expected over time to transform the management of pensions for employers, which can slash their exposure to the volatility of the stock and bond markets, as well as for the insurance industry, which gains a source of growth at a time when some traditional businesses are slipping.
The defined-benefit pension plan, paid out to retirees until their deaths after a lifetime of employment at a single company, was a centerpiece of what we call the “blue social model” that dominated the U.S. in the postwar period. But such plans make much less sense today: They reduce worker flexibility at a time when people are more likely to switch jobs on a regular basis, and they are increasingly hazardous at a time when a technological advance can end a company’s life in the blink of an eye.
Because many employers have come to see defined-benefit pension plans as an unnecessary source of risk and drag on investment, they are rarely on offer for new employees outside of government bureaucracies (which have clung to the blue model despite these dramatic economic changes to the great detriment of taxpayers). And now corporate behemoths are trying to shed the last vestiges of their pension plans even for current retirees—yet another manifestation of a blue model system in its death throes.