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blue model death throes
Big Companies Offload Pension Plans

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.

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  • Fat_Man

    The politics of pension funds makes some very depressing reading. I won’t rehash. But one of the truly catastrophic decisions that Congress made to regulate pension plans was the creation of PBGC (Pension Benefit Guaranty Corp) . It was supposed to be an FDIC for pension plans. Every time a pension sponsor goes bankrupt, it dumps its pension plan on PBGC, which is becoming insolvent itself.

    We should be thrilled that some pension plan sponsors are bringing in insurance companies that are far less likely to go bankrupt than the sponsors. It is good news for the employees, pensioners, and taxpayers.

    BTW one reason that Congress went the way it did is that orthodox liberal economists (e.g. J.K. Galbraith) in the 50s and 60s held that major corporations had monopolistic control over their markets and had hypnotized their customers into buying their products, and that the corporations were permanent fixtures. They were wrong on this point, as they were on everything else.

  • FriendlyGoat

    It’s not like insurance companies are short of actuaries to tell them what the liabilities are. The question is whether those insurers have any escape hatches in these transfers for getting out of actually paying the claims in ways the original sponsors would not have. I suspect they don’t, but I don’t really know that. I do know the insurers expect to make money or they would not be taking this on.

    • Angel Martin

      I don’t automatically accept that these insurance co’s know what they are doing (eg. AIG Insurance).

      Also, there is also the incentive to ignore tail risk. These insurance co execs are going to get huge bonuses for bringing in these big pension management accounts. They have an incentive to ignore the risk to their own companies of future stock and bond market turmoil.

      By the time things blow up, they will likely have cashed in their stock options and bonus cheques and been long retired.

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