Pension Plans And Negotiations Part 2

To continue where Part 1 left off, we’ll examine how some of the pension issues related to the Philadelphia Orchestra situation have influenced the course of negotiations.

The Philadelphia Orchestra Association (POA) utilizes a defined benefits pension plan. This means the POA and not the individual players assume the risk to ensure that the pension plan has enough funds to make the required payments to retired employees.

The POA expands on this position via their “Negotiation Update” page.

“The fact is our current defined benefit plan is far too expensive with far too much risk associated with it. Our pension expense has increased dramatically as a result of the prolonged stock market decline in the last few years.”

It would seem that risk (defined as “The quantifiable likelihood of loss or less-than-expected returns” by investorwords.com) isn’t something you can opt out of just because you’re experiencing the “less-than-expected returns” portion.

Nonetheless, this appears to be the source of the POA’s frustration. Since the stock market has not performed as well as they had originally anticipated, the POA is now attempting to change the pension plan over to a program that transfers risk to the employees.

“…can save more than $500,000 and have less risk…by freezing the current defined benefit plan and converting all musicians to the American Federation of Musicians plan.”

I attempted to contact the POA to expand on this point but the POA spokesmen, Steve Albertini, has not returned calls or emails.

One of the defining factors that determine where an individual chooses to work is the retirement plans the potential employers offer. That’s no different for the musicians at the Philadelphia Orchestra or any other orchestra in the U.S.

For the POA to change the organization’s pension plan by converting it to one where the Philadelphia Orchestra musicians’ negotiation committee claims will generate between 14% – 21% less than their current benefit plan is tantamount to what the musicians are defining as a bait and switch scam.

Jon Koen, musicians’ negotiation committee representative, said that the players are willing to consider the idea of switching to the AFM pension plan, but they would have to wait for the POA to present a better offer than they are currently submitting.

In Part 1, we heard from Richard Wagner, CAP and Senior Manager for Clifton Gunderson LLP where he provided a clearer understanding of defined benefit vs. defined contribution pension plans. During our interview he mentioned there has been a push from groups like the airline industry to have congress create new laws that reduce or cap employer contributions to pension plans, regardless of which option they utilize.  To date, congress hasn’t agreed to play along.

To date, the POA has approved the use of inadequate market forecasts to determine required contributions. As a result, they underfunded the pension plan that, when compounded over the years, produced increasing financial stress.

As a result, the POA has found itself suffering under the results of bad decisions made by leaders such as board chair Richard Smoot and president Joe Kluger.

All of this touches on a fundamentally important issue regarding orchestra contract negotiations: incentive for progress.  If the POA, or any orchestra administration, believes they can simply renegotiate their way out of a portion of the contract that they can’t live up to, then what’s to stop them from continually promising whatever they want just to make musician employees happy knowing full well they can just recant later on? The concern is creating a culture that no longer holds an institution’s executive leadership accountable.

Useful Online Resources

I’ve already mentioned  GuideStar many times here at Adaptistration but here’s another site you should visit: http://www.freeerissa.com, where you can review the tax forms related to pension plans and all related schedules free of charge (although you will need to register). You can even go take a look at the POA’s form 5500, where you’ll find that as of 2001 they offer their staff a defined benefit retirement plan based on their previous levels of salary.