At a large energy company with a substantial defined benefits plan, board members expressed concerns to management about younger workers' growing desire for pension portability. The board requested a review of company policy on the topic, seeking strategies that would help the company attract and retain the in-demand, highly skilled labor force needed to achieve desired performance goals.
Management was also worried about increasing employee turnover. But its knowledge of pension portability was sketchy—there wasn't even a clear consensus among the managers on what exactly the term meant. The client sought Milliman's assistance in defining the concept and determining how the company might alter its existing pension plan to offer greater portability—and attractiveness—to employees.
Discovering the underlying issues
Milliman consultants began by listening carefully to concerns on what the managers understood about portability. Based on this information, we developed an educational presentation with modeling that demonstrated the two underlying and often competing aspects of portability.
The first aspect of portability was the employees' desire to "take my pension with me" when departing the company. The available pension solution to this issue was simple: allow lump-sum payouts, which the current plan did not.
The second aspect was more complex, because it involved the effects at retirement of employees spending their careers at many companies rather than one. The nagging question here for workers was, "Will I have fewer benefits when I retire if I change jobs during my career?"
The solution for this issue has been identified in the popular press as a 401(k) versus pension issue. But Milliman consultants demonstrated that instead, the issue can be better defined as career average pay versus final average pay. The company's existing system was based on the final five years of employee salary, a method which slighted younger workers when they departed. The challenge was how to offer mobile workers attractive pension benefits while at the same time not slighting more loyal workers who would stay for decades, or their entire careers.
Designing portability that preserves benefits
To help the company formulate a response to the perceived overall increase in worker mobility, Milliman provided background information, including recent studies on worker mobility and the rise in 401(k) plans, which often are implemented by companies hoping to appeal to more mobile workers.
Our proposed solution began by laying out the chicken-and-egg issue of worker mobility. Our research and analysis, supported by academic studies, confirmed that rather than 401(k) plans being implemented in response to increased mobility, it is the opposite: Mobility is encouraged by the presence of 401(k) plans.
We advised the client that the company could achieve pension portability within the framework of its existing defined benefit plan, without instituting a 401(k). Decommissioning a defined benefit plan has a range of potential downsides, because it is often accompanied by negative press and plummeting employee morale.
Instead, the company began offering lump-sum payouts. The formula for pension benefits changed from a percent of final average pay times the number of years' service, to 1.7 percent of the career average pay. This new model supported younger workers' expected mobility but still offered greater rewards to employees who stayed on long-term.
The new program succeeded in attracting and retaining a scarce, skilled workforce and in improving employees' perception of the retirement benefit program's value. The first aspect of portability is modestly supported with the availability of lump-sum payouts, while offering shorter-term workers the potential to attain similar ultimate retirement benefits as those of longtime employees.
