Large employer, union embrace Adjustable Pension Plan model

In a move that might signal an important trend in pension design, a major labor union and employer have agreed to adopt an Adjustable Pension Plan (APP) effective January 1. Approximately 4,000 employees will be covered by the innovative plan.

With the APP (also sometimes referred to as a variable defined benefit or variable DB plan), the impact of the pension portfolio's gains and losses are shared between the employer and plan participants. A traditional DB-based benefit is calculated, along with an adjustable component, and the participant receives the higher of the two. However, the APP shares the fundamental characteristic of a traditional DB in that retirement and longevity risks are pooled, and all money is pooled and managed by a professional.

Cheiron has been active in developing and fine-tuning the basic design concept upon which the APP rests. "We believe the APP will gain popularity as a means for traditional pension sponsors to maintain a DB plan, while controlling the financial risk they are no longer able to sustain," says Gene Kalwarski, Cheiron's CEO and a Principal Consulting Actuary. "We are working with other organizations interested in the APP," he adds.

For example, a state-wide pension system working with Cheiron is currently considering adopting an APP for the benefit of new hires.

In the newly adopted APP, the floor defined benefit is calculated based on a 5.5% interest rate assumption. The adjustable portion of the plan's benefit will reflect earnings up to a rate initially capped at 10%. Earnings above the cap will serve to create surplus plan assets in the event the plan has negative earnings at a later date.

The parties also agreed to additional safeguards. For example, if the plan's funded percentage falls below 90% for two consecutive years, the plan will be amended to provide that the benefit rates for the minimum floor benefit will be reduced by 10%, until the funded percentage exceeds 90% again. And in the opposite scenario--if the funded ratio exceeds 110%, the excess over that threshold will be used to restore any lost floor benefits that occurred due to the funded percentage dropping below 90%.

More plan provisions and additional details on the rationale for the plan's adoption and employee response will be described in this space soon.