Defined Benefits Pension Plans

Defined Benefit Pensions Are Popular With Employees

17 Jan 2011

Fran Hawthorne

A recent Towers Watson survey finds that defined benefit pensions are the reason 59 percent of the respondents intend to stay with their current employer.

January 20, 2011 - Remember those traditional pension plans that pay former employees regular monthly income after retirement? The ones that are supposed to be obsolete? Well, suddenly they’re looking a lot more attractive, even to employees in their twenties and thirties. And there are some reasons to think this popularity will last.

In a new survey, 59 percent of the respondents with a defined benefit plan told the consulting firm Towers Watson that “my company’s retirement program is an important reason I will stay with my current employer.” Of the lucky few who actually got hired in the past two years, 60 percent cited the defined benefit plan as “an important reason I decided to work for my current employer.”

Skeptics might point out that in this economy, anything could be “an important reason” to take or stay with any job. However, employees reported far less loyalty if they had only a defined contribution plan: Just 32 percent of the long-timers and 20 percent of new hires in that situation considered their plan an “important reason.”

The poll also defies two standard bits of conventional wisdom. Supposedly, nobody expects to remain at the same company for 20 or 30 years. And younger workers in particular supposedly prefer the flexibility of a 401(k) that they can carry with them as they job-hop.

But in the Towers Watson report, people under 40 showed a strong appreciation of defined benefits, with 63 percent citing their pension plan as an “important reason” for staying with their company, and 43 percent citing it as a key factor in taking their job.

Furthermore, large majorities of nearly all types of respondents – younger and older, with pensions or with 401(k)s – said that “I would like to continue working for my current employer until I retire.”

Why the sudden popularity? To quote Bill Clinton in 1992: It’s the economy, stupid.

“In a very uncertain economic environment, there is a real desire for security,” says Kevin Wagner, a retirement practice director at Towers Watson. “People have seen their 401(k) benefits decimated. They are scared to change their jobs.”

A few caveats are in order regarding the survey, which was conducted in May and June 2010 and just released in December. It covered 3,100 people, only 1,150 of whom had defined benefit plans. That included hybrid DB plans, but the firm didn’t break down the plans by type. Still, Wagner considers it a fair sample because it covered a national cross-section of industries.

More important, he doesn’t think everyone will revert to unconditional love of 401(k)s when the economy picks up again. For one thing, he says, people don’t switch jobs as much as conventional wisdom assumed. “Especially once one gets to the age where they’re raising a family, people value security,” he says. “I wouldn’t be surprised if we continue to see an awful lot of people who expect to continue working for their current employer for the rest of their working life.”

Wagner also thinks employees’ expectations have been tempered by the recession, and they’ve come to appreciate traditional pensions. “They liked their defined contribution plans [in the past] because they saw themselves always earning 15 percent on their investments. People now understand that there’s a reason to have a nice balance,” he says.

In short, they will want both types of plans from their workplaces.

Will employers be that generous? Another survey from Towers Watson, coming out a couple of weeks later, offers a more pessimistic outlook. In this poll of 300 pension executives at large companies, only about half the DB plans are fully open to new hires, and 15 percent of those managers expect to freeze or close them in some way in the next five years.

For his part, Wagner doesn’t foresee a rush to install traditional pensions. “But those that have them will be more reluctant to get out of them,” he predicts.

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.