From Pensions and Investments:
In an apparent first, a public pension plan files for bankruptcy
In what’s believed to be a first by a public pension plan, the Northern Mariana Islands Retirement Fund, Saipan, filed for Chapter 11 bankruptcy protection on Tuesday.
The public defined benefit plan is only 38.8% funded, thanks to low investment returns and a benefit structure that’s been increased without raises in funding, according to the bankruptcy filing in the U.S. District Court for the Northern Mariana Islands, a U.S. commonwealth consisting of three major islands in the Western Pacific.
Currently, the pension fund holds $268.4 million in assets, with $911 million in liabilities.
A chapter 11 bankruptcy filing is for a reorganization, not a liquidation. It means all creditors, and that includes those who are or will be receiving retirement checks, will be held at bay while the entity tries to work out a plan to pay them a lot less than they were originally promised.
In a defined benefit plan employees are given a promise to pay them a pension which will come due far into the future, perhaps 30 to 40 years into the future. The employer also promises to make annual contributions to the pension plan so that when the pension payments come due there will be adequate funds to enable the company to keep the promise. Actuaries are employed to calculate how much the company will need to contribute each year to fund the plan, and these calculations are complicated taking into account life expectancies, future rates of return on investment, etc. As is often the case, predictions can be faulty, especially about the future.
An added wrinkle in the scheme of things is when employees and their union successfully negotiate modifications of the initial promise and gain a new promise of higher pension contributions and future payouts. When the company has a bad year and cannot make all of its contribution for that year sometimes the obligation can be kicked into the future when the company promises to make it up. But the unions keep pressuring for more and more of the company’s profits, in addition to increases in the promised future retirement benefit, and a foreseeable disaster soon awaits.
A much better idea is a defined contribution plan. No future promise, just an annual contribution to a plan that is wholly owned by the employee. No promise of any specific amount, but whatever is paid in each year belongs to the employee forever regardless of the future success or failure of the company, or regardless of the future financial ability of the governmental entity involved.