Pension Plans And Negotiations Part 1

Among the many issues related to contract negotiations, one of the leading subjects is retirement benefits and pension plans in particular.

This negotiation season is no different, but pension plans seem to be more of a hot button issue. The reasons are related to the ability of orchestra associations to adequately fund their pension plans as required by their contract with the musicians and Federal regulations.

Take the current negotiation underway at the Philadelphia Orchestra. The Philadelphia Orchestra Association (POA) has stated that it can not afford to continue to fund the musician pension plan in its current form. As a result, they want to make changes to the plan.

Pension funding is a complex topic and although it may seem like they would be designed to have enough money to pay out what’s required, that’s not always the case.

To gain a better understanding for how all of this works, I contacted Richard Wagner, CAP and Senior Manager for Clifton Gunderson LLP.

According to Wagner, one of the first things to understand is that there are two primary types of pension plans: one that pays out based on “defined contributions” and one that pays out “defined benefits.”

Defined Contribution plans pay the retired employee benefits based on what percentage of their salary they contributed to the plan over their years of employment.  Employers can also contribute to the plan based on a variety of percentages and scales. In this plan, the employee bears the investment risk since payments are based on the value of their plan as determined by the market over the course of the contribution period and benefit period.

Defined Benefit plans pay the retired employee a specific amount based on salary history and years of service, and in which the employer bears the investment risk. Contributions may be made by the employee, the employer, or both. An actuary (someone versed in the collection and interpretation of numerical data, especially someone who uses statistics to calculate insurance premiums) determines how much an employer will need to contribute over the years in order to maintain adequate funding for the benefit payments.  So if the market goes down considerably, then the employer contributions need to increase proportionately in order to make up the difference.

The following chart illustrates how an employer must contribute additional funds when the market produces lower returns.

So now that the two types of pension plans make a little more sense, we can start to examine how this influences an orchestra’s contract negotiations.  I invite you to return tomorrow where we’ll examine some of the pension issues related to the Philadelphia Orchestra negotiations and try to illuminate the severity of their situation.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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