From a small northwestern observatory…

Actually, this is old news.  It’s fairly well accepted now that, at least here in the U.S. and in the U.K., the only jobs with defined benefit retirement plans (or nearly so) are in the public sector — government employees, military, and the like.  There are a few union-specified plans still out there, but given the dearth of union-members outside government service, these are waning away, as well.

For the uninitiated, employer-funded retirement plans basically fall into two categories (separate and apart from individual retirement plans, or IRAs):  defined benefit and defined contribution.  In the former (DB), the employment agreement includes a provision that after a certain date (say, 30 years of employment), the employee may retire with a lifetime of pay equal to some percentage of, say, the last year’s salary, or the average of the last five years, or something like that.  In a defined contribution (DC) plan, the company agrees to make annual contributions toward a retirement plan via some formula, and upon retirement, the employee will receive whatever is there.  The 401-K is the most popular type of DC plan here in the U.S.

This topic came to my attention due to an article in Institutional Investor a few days ago titled “Shell Is Last FTSE 100 Company to Close DB Plan.”  We have to remind ourselves that Shell isn’t an American company, but rather a decidedly European one, (“Royal Dutch Shell”), headquartered in The Hague but registered in London with 101,000 employees world-wide.  This is confusing sometimes, because Shell-US has a headquarters in Houston and employs 22,000 here in America.

But, back to the subject at hand.  Shell just announced that it will accept no further new members into its DB plan, becoming the last FTSE company to do so.  Thus, in the U.K. at least, the DB plans are no more.

The economic implications of this are fascinating, and can only be viewed in longer-term perspectives.  Post WW-II saw the emergence of a wide-spread middle-class in the developed world, and much of this was linked to job-loyalty.  Much of that job-loyalty stemmed from the idea that if a person worked for a particular firm for an entire career, that person would be “set for life”.  Of course, stock market hems-and-haws coupled with rapidly changing demographics and mergers/dissolutions of old, well-established names cast significant doubt on the ability of most of these 30-year horizons to actually come to fruition.  Nonetheless, that was part of the American (and elsewhere) post WW-II middle-class dream.

With the dissolution of DB plans, everyone is more-or-less on his or her own.  A well-managed and well-funded 401-K, coupled with a near-religious funding of an IRA can do pretty much the same thing as a DB plan, although it requires a substantial degree of discipline, financial acumen, and planning on the individual’s part.  Sadly, we have to remember that exactly half the people in any society are below average.  Hence, cradle-to-grave self discipline, while it sounds like fun in a Ron Paul speech, none-the-less has serious societal implications when put to the test.

I’m on the Board of one of those “dissolved” DB plans that isn’t taking any more new members.  Actuarily, it’s a royal pain in the neck.  No “new” money is coming in for new employees, but the old employee’s aren’t fully funded yet and the stock market sufferings, coupled with demographic shifts, has turned all of us on the board into actuaries cum soothsayers.  Fortunately, the sponsor organization has the resources to fix any unfunded problems, but I’m sure there are plenty of other DB plans out there with funding issues.  Indeed, plenty has been written in recent months about very real shortfalls in public (state and municipal) DB plans.

As our population gets older, this shift from DB to DC plans will get more interesting.   Recall that the Chinese have a curse, “May you live in interesting times.”