TRENDS IN DEFINED BENEFIT PENSION PLAN

During the past year, the number of plans PBGC insured declined in each of its two insurance programs. Both programs also experienced an increase in the number of participants they covered. These changes are consistent with recent PBGC experience. However, the characteristics of the plans PBGC insures are changing, and data are now available for the first time that quantify the shift from a traditional benefit design to a hybrid design.

Since the mid-1980s, there has been a shift away from private-sector defined benefit pension plans. The combined number of PBGC-insured single-employer and multiemployer defined benefit pension plans peaked at 114,400 in 1985 but has declined sharply since then to about 32,500 plans in 2002. During the same time period total participation in PBGC-insured plans increased from 38 million to 43.9 million people. The reduction in the number of plans since 1985 has occurred primarily among small plans, those with fewer than 100 participants. However, the decline in the number of insured plans is not confined to the small plan universe.

PBGC insured more than 90,000 small plans in 1985 but fewer than 19,000 in 2002. The period of greatest loss was during the early 1990s when these small plans were declining at a rate of more than 12 percent per year. In the last five years, the rate of decline has fallen to about eight percent per year. Because small plans continue to disappear at a faster rate than any other group and because 60 percent of the plans PBGC currently insures are small plans, their decline continues to be the major driver in the shrinking number of PBGC-insured plans.

The number of plans with 100 to 999 participants peaked at more than 20,000 in 1987. Since then, the number of plans in this category has fallen to just 8,800. These plans are declining at a rate of about seven percent per year, slightly faster than the average rate of five percent per year over the previous decade.

Plans with 1,000 to 4,999 participants grew from 3,800 to more than 4,000 between 1985 and 1990 but have declined to about 3,300 since. Over the past five years, these plans have been disappearing at a rate of about three percent per year compared to a rate of one percent per year from 1990 through 1997.

Larger plans continued to grow into the 1990s but their numbers, too, are now shrinking. Plans with 5,000 to 9,999 participants increased from about 560 in 1985 to 700 in 1998 but have declined by about two percent per year since then to 639. The largest plans, those with at least 10,000 participants, grew from fewer than 500 in 1985 to more than 800 in 2001. However, their numbers fell slightly to 796 in 2002. The growth through the 1990s in the number of very large plans is attributable to two factors. First, the rapid increase in the number of inactive participants (retirees, beneficiaries, and separated vested participants) moved some plans into a higher size category. Second, there has been considerable merger activity since 1985, which has resulted in the formation of large plans.

Even though the number of plans PBGC insures has fallen precipitously in recent years, the increase in the number of the largest insured plans pushed the number of participants PBGC covers to 43.9 million in 2002, up slightly from the 43.8 million covered in 2001 and up substantially from the 38.0 million covered in 1985.

The growth in the number of PBGC-insured participants was caused by a near doubling in the number of inactive participants from 11 million in 1985 to almost 21 million in 2000 (the latest year this information is available from the IRS Form 5500 reports). The greatest growth in the number of PBGC-covered participants has been among the separated vested participants whose numbers increased by 6.1 million between 1985 and 2000. As a share of PBGC-covered participants, separated vested participants grew from less than 10 percent in 1985 to more than 22 percent in 2000. The number of retirees and beneficiaries of deceased participants also grew over this period, but by only 3.7 million. Their share of PBGC-covered participants increased from just under 20 percent to more than 25 percent over this period.

The number of active workers PBGC insures actually fell from almost 27 million in 1985 to less than 23 million in 2000. Meanwhile, the labor force has grown. Now only about 20 percent of private-sector wage and salaried workers are covered by PBGC-insured defined benefit pension plans, down from more than 30 percent in 1985. If the trend continues, active participants will constitute less than half of PBGC-insured participants in 2003.

During the middle and late 1990s, hybrid plans, primarily cash balance plans, became a growing percentage of the plans PBGC insures. A hybrid plan incorporates elements of defined contribution plans into its design, often expressing benefits in terms of an account balance and containing a lump sum payment option that the participant can exercise upon termination of employment with the plan’s sponsor. The sponsor typically makes all contributions to the hybrid plan and bears all the plan’s investment risk.

Recently available data indicate that about four percent of the single-employer plans PBGC insured in 2000 were hybrid plans. This small percentage is somewhat misleading because the estimated percentage of insured plans that were hybrid plans increases rapidly with plan size, from less than two percent of plans with fewer than 100 participants to more than 25 percent of plans with 10,000 or more participants. In 2000, hybrid plans contained an estimated 20 percent of all PBGC-insured single-employer plan participants. Not all these participants will receive benefits based on the hybrid plan design, however. Many hybrid plans converted from a more traditional defined benefit plan and most of their retired, separated, and even some active participants will receive benefits based on the original plan design.

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