Term Paper on "Electronic Health Records (EHR) -- Pharmacy Pension"

Term Paper 15 pages (4328 words) Sources: 10

[EXCERPT] . . . .

Electronic Health Records (EHR) -- Pharmacy

Pension plans

The unprecedented economic crisis of 2008 and 2009, increased salaries of not-for-profit workers, and the implementation of certain funding provisions of the Pension Protection Act of 2006 ("PPA") created a "perfect storm" for not-for-profit organizations that maintain defined benefit pension plans.

Traditionally, not-for-profit employers offered defined benefit pension plans as a way to attract and retain valuable employees and to compensate for low salaries, relative to the for-profit sector. In the 50s, 60s, and early 70s, these plans were often contributory in nature, where the employee would have to contribute in order to be eligible for a benefit. After the adoption of the Employee Retirement Income Security Act of 1974 (ERISA), these benefit plans became non-contributory, placing the entire funding burden on the employer. During times of stock market growth and/or low interest rates, funding these plans was not a burden to the employer.

Recently, however, employers became more liberal with their investment strategies, gambling away plan assets, if you will, in the stock market, with the hope of making large returns. During the past two to three years, most employers who adopted such an investment strategy lost their investments. This left many employers with underfunded benefit plans.

Usually, having an underfunded benefit plan would not be cause for too much concern because the employer could selectively choose to fund only those liabilities that were close to coming due. For example, an employer would make sure that it could pay a benefit for a 60-year-old employee, but would not be too concerned if the benefit for a 30-year-old employee was not yet funded. Today, however, provisions of the PPA require that plans become fully funded within seven years and place very high minimum funding requirements on employers. Add to that the high salaries that not-for-profit employees can make (on which a benefit under the plan is based), and the resulting situation can be a not-for-profit employer whose donations and government grants are down and who is faced with a huge benefit plan funding obligation from under which it cannot escape (not to mention the increased need in this down economy for the services the employer provides to the public).

Some relief may be coming. In October, 2007, Congressmen Earl Pomeroy (D-ND) and Pat Tiberi (R-OH) introduced the Preserve Benefits and Jobs Act, which would provide some relief to the pension funding obligations employers are facing, while at the same time would protect workers pension benefits. Although not-for-profits are not the only group of employers impacted by this "perfect storm," their situation is unique in that most of them do not have huge resources to draw from and are limited in their ability to raise income.

Pension Regulation History

The origin of modern pension regulations can be traced to the 1960s. Prior to this period, employers and labor unions enjoyed a lot of flexibility in structuring, funding and managing pension plans.

"The history of ERISA can be said to have begun in 1961 when President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker Corporation, an automobile manufacturer, closed its plant in 1963; the pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions." (Employee Retirement Income Security Act).

As a result, many employees received only a small percentage of the "actuarial value" of their pensions, and nearly 3,000 workers received none at all. The next milestone

"came on September 12,1972, when NBC broadcast Pensions: The Broken Promise, an hour-long television special that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly." (Employee Retirement Income Security Act).

In 1974, Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), designed to safeguard Americans whose retirement assets are maintained in employer-run pension plans. ERISA established minimum standards and requirements for private pension and employee benefit plans, to ensure "that funds placed in retirement plans during their working lives will be there when they retire." (U.S. Department of Labor/EBSA) The goal of ERISA was

"to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure to them of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts." (Employee Retirement Income Security Act).

ERISA also established the Pension Benefit Guaranty Corporation (PBGC), a federal corporation that provides "coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants." (Employee Retirement Income Security Act). Currently, the PBGC

"protects the pensions of more than 44 million American workers and retirees in more than 29,000 private single-employer and multiemployer defined benefit pension plans. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans." (Pension Benefit Guaranty Corporation).

Defined Benefit Plans

There are two types of pension plans: defined benefit and defined contribution. A defined benefit plan means that the participant (the employee) will receive a specified monthly benefit amount (i.e., the benefit amount is "defined) at retirement.

"The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1% of average salary for the last 5 years of employment for every year of service with an employer." (U.S. Department of Labor)

With a Defined Benefit Plan,

"the liability of the pension lies with the employer who is responsible for making the decisions. Employer contributions to a defined benefit pension plan are based on a formula that calculates the investments needed to meet the defined benefit. These contributions are actuarially determined taking into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover." (Defined Benefit Pension Plans).

There are two types of Defined Benefit Plans: funded and unfunded. "In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. (Defined Benefit Pension Plans). In contrast, a funded plan, collects "contributions from the employer, and sometimes also from plan members," (Defined Benefit Pension Plans) that are invested in a fund and managed by the employer or a pension fund manager.

"The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan." (Defined Benefit Pension Plans)

Pension Fund Investment Trends

Pension funds invest the monies of their participants and manage them over the long-term in such a way as to provide a return that will guarantee future income for the employees in retirement. Traditionally, pension funds, including Defined Benefit plans, invested in vehicles that had established history and well-known risk profiles, such as equity (stocks of companies traded publicly). "In general, pension schemes around the world have historically invested in a combination of equities, high quality bonds and property." (How Will Pension Funds Manage?).

However, in the decade leading up to the 2007 recession, more and more pension funds -- like many other investors -- had begun to invest in a more "risky" vehicles, lured by the prospect of higher returns. As Stewart describes, "[f]ollowing a period of poor performance (and consequent underfunding) after the collapse of equity markets around the millennium, many pension funds adopted a new way of investing," (6) increasing the portion of their portfolios that were invested in to hedge funds "for two main, interconnected reasons. On the one hand, many pension funds [were] attempting to match assets and liabilities more closely to avoid under-funding in future (a trend which [was] being supported by regulatory and accounting changes). Hedge funds can be used to manage, reduce and indeed hedge such liability risks. Hedge funds also allow for risk reduction via increased diversification away from traditional equity market holdings (via holding in commodities,… READ MORE

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