How effective is pension outsourcing?

Pension outsourcing is considered an organization’s makeover tactic to avoid greater expenses on account of its employees. Over decades, employees have been opting for secure jobs that involve provident funds and other factors that benefit them in the future. It is a different case today as employers are seeing every possible way to move out of the system called the pension plan. Through this system, the employers had to take full responsibility of employees’ retirement benefits. This has now turned out to be a burden for employers, which forces them to opt out of the system.

Many well-known companies in the market are seen to be veering away from implementing this plan. As a result, the younger employees who are fresh entrants would not benefit from the traditional pension plan system and will have to invest from their own pockets. It would be much worse in case of youngsters who are yet to fetch themselves jobs.

Pension outsourcing

Companies have taken certain steps to manage their pension system. If they fail in attaining positive results, they would simply choose to avoid it. Let us see few companies which have taken active step towards managing their pension plan system rather than avoiding it.

Verizon, a major mobile devices firm has recently moved certain part of its pension commitments to a different firm. The company has followed the simple strategy of investing the employee benefits in financial institutions who promise to deliver better benefits.

The company bought annuities for its 41,000 former employees by transferring its pension commitments of $7.5 billion to Prudential. This transferred amount represents a quarter of Verizon’s managed assets. As a result, Prudential would pay the Verizon retirees with the same benefit they had been receiving from the company. This would reduce Verizon’s worry of investments in pension-fund assets.

But the retired employees of Verizon believe that the move made by the company is not a trustworthy option. With competition between financial institutions increasing, prudential can be expected to go out of business in the future which may find them opting out from being a Pension Benefit Guaranty Corporation. Hence the retired employees may lose their benefits.

Recently, General Motors followed the same strategy of buying annuities for its 110,000 salaried retirees from Prudential.

Even employees who are given access to pension plans can choose to buy annuities by investing some or all of their money in a financial institution. However, at the end of the day, it is neither the employer nor the employee who are most benefited.  In such cases, it is usually the financial institution that may end up being the winner.

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