Ford Motor
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GM
The agreement reportedly marks significant progress in increasing worker wages. According to the UAW, the agreement provides a 25 percent increase in base wages through April 2028, raises the top wage by more than 30 precent to more than $40 an hour, and lifts the starting wage by 68 percent to more than $28 per hour. While UAW called for a 40 percent wage increase, these wage improvements indeed are substantial and will improve the financial security of Ford workers.
The deal reportedly also includes improvements to retirement benefits for current retirees, workers with pensions, and those with 401(k) plans. As the details emerge, it will be important to understand how substantial the benefits improvements are because most U.S. workers are struggling when it comes to retirement security. Initially, the UAW said it wanted a restoration of defined benefit (DB) pension plans for workers hired after 2007, which of course would be a huge win for ensuring workers can have a secure retirement after a lifetime of work.
JP Morgan Says Pensions Make Good Business Sense
At this point, it’s indisputable that middle and lower income workers have a better shot at a secure retirement when they have a pension supplemented by individual 401(k) savings and Social Security – the so-called three-legged retirement stool. It’s also a fact that pension benefits play a critical role in attracting and keeping workers, which is increasingly important to employers given the chronic labor shortage in the U.S.
But beyond these advantages of pensions, some experts argue that it’s a smart business move for companies to keep or re-open their employee pension plans. A recent JP Morgan Asset Management report makes the case that there’s a “collective blind spot” when it comes to the value pensions provide to corporate plan sponsors.
In Pension Defrost: Is it time to Reopen DB Pension Plans—Or at Least Stop Closing and Freezing Them?, JP Morgan analysts indicate that pension plans can actually enhance corporate finance. The report finds:
“A well-funded DB offers the most cost-efficient mechanism to finance retirement benefits for employees. Running a low risk, well-funded plan can be accretive to earnings while also reducing corporate leverage. Contrary to conventional wisdom, a pension surplus is not simply a ‘trapped asset’ on the balance sheet. Sponsors have several other mechanisms to capture the value of a pension surplus, up to and including the reintroduction of benefit accruals for current and future workers.”
Indeed, other research finds that pensions are a far more efficient means of financing retirement, offering substantial cost advantages over 401(k) defined contribution (DC) plans. A typical pension has a whopping 49 percent cost advantage as compared to a typical 401(k) DC account, with the cost advantages stemming from longevity risk pooling, higher investment returns, and optimally balanced investment portfolios. So, if Ford has agreed to increase its 401(k) contributions, imagine how much further that investment would go if the money instead were in a doubly-cost efficient pension plan for its workforce?
A typical pension has a 49 percent cost advantage as compared to a typical 401(k) account.
The JP Morgan report goes on to analyze what is preventing companies from re-opening pension plans (e.g., fears about past funding challenges) and offers great detail on how the environment has changed such that there are smart business reasons to reconsider offering pensions. It concludes that while every company faces a unique situation, the bottom line is that pension plans provide “economic, strategic and social benefits to both employers and plan participants” and that pensions “deserve a comprehensive and fair assessment before sponsors dash blindly for the exit.”
It appears the battle to bring back pensions for Ford employees will have to fight another day. But maybe there there’s still a glimmer of hope for General Motors Co. and Stellantis workers as the UAW continues negotiations? If not in the auto industry, maybe other companies with frozen pension plans will take a hard look at the evidence about the wisdom of offering pension plans. Certainly, a pension renaissance would benefit not just workers, but employers and the broader economy too.