I’m afraid I can’t share the enthu­si­asm for IBM’s new “cash-bal­ance” pen­sion plan as described in Brooke Mas­ters’ column “Could a US pen­sions revolu­tion be on the cards?” (Opin­ion, Feb­ru­ary 22).

Cash-bal­ance pen­sions are tech­nic­ally defined bene­fit plans, because unlike 401k defined con­tri­bu­tion pen­sions, mem­bers have the right to con­vert their cash bal­ance into a life­time pen­sion.

But they are a mil­lion miles away from US and UK defined bene­fit pen­sions — based on salary and years worked, guar­an­teed by the com­pany — because the rate at which the cash bal­ance is con­ver­ted into a pen­sion is decided at retire­ment, so mem­bers have no guar­an­tee about how much they will be get­ting.

In the case of IBM, the only guar­an­tee from the com­pany is that pen­sion con­tri­bu­tions will earn a 6 per cent notional “return” until 2027, and the 10-year US Treas­ury yield bey­ond that — much lower than the likely return on an indi­vidual 401k defined con­tri­bu­tion pen­sion, hold­ing a mix of bonds and equit­ies. And more import­antly, IBM’s annual pen­sion con­tri­bu­tion is just 5 per cent, which com­poun­ded at the Treas­ury yield, just isn’t enough for a half decent pen­sion.

Other US com­pan­ies with large DB sur­pluses may fol­low IBM, but it should be seen as fin­an­cial engin­eer­ing — mainly avoid­ing tax on with­draw­ing sur­pluses — not a “pen­sion revolu­tion”.

John Ralfe
John Ralfe Consulting
Hognaston, Derbyshire, UK

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