Wednesday, September 15, 2010

Why switch from DB to DC pension plans?

For years I've been urging the Council to move from Defined Benefit Pension Plans (DB) to Defined Contribution Pension Plans (DC). I've been blogging about it for four years, but have been advocating it even longer.

I intend to post a few times about the DB / DC conversion in the near future, so I want to revisit my reasons for advocating this.

Despite assertions by many elected officials and candidates for office, I do not believe that this would necessarily save any tax dollars. Rather, the issue is risk:

Who bears the risk?

My preference is for both the upside and downside risk to be carried by the employee as the ee will have a better understanding of his / her future goals. Additionally, DB plans allow government to act irresponsibly by underfunding pensions today and saying the underfunding will be addressed at an unspecified time in the future... in other words... kick the can down the road. And though Cheshire has acted responsibly, elections occur every two years. So I simply want to eliminate the potential mischief that lies past every election.

Furthermore, a basic rule in accounting is the "matching" principle. An organization should match revenue with expenses. IMO DB plans do not strictly adhere to this principle because services (i.e. expenses) today may be funded (i.e. tax revenues) tomorrow. On the other hand, DC plans do not permit this. They would match taxes with services and require elected officials to address the tax question today, not tomorrow.

I think it is important to note that the town has six employee groups: five unions and other non-union employees. Of these six groups, one union and the non-union employees only offer DC plans to new hires.

During the ongoing union negotiations,* I hope to move the three open contracts to DC plans for new hires.

Tim White

* Three contracts are still being negotiated for the July 1, 2009 to June 30, 2012 contract period.

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