Hopefully, you caught Peter Dobrin’s article in the 6/27/2011 edition of the Philadelphia Inquirer which examines the Philadelphia Orchestra Association’s (POA) request to be relieved from their musician pension obligations via their bankruptcy petition. Dobrin provides an enormous amount of insight into current events an additional item worth considering here is the POA’s historic position on those pensions…
In 2004, the POA was publicly stating that the musicians’ defined benefits pension plan in place at that time was no longer sustainable and as a result, the POA was pushing to enter the AFM plan (which is also a defined benefit plan) because according to the organization it would save money and reduce their risk. Here’s what they said back in 2004 via their “Roadmap to Extinction” (remember that?):
“…[we] 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.”
Back then, the musicians were initially against the idea but willing to consider the American Federation of Musicians (AFM) plan and ultimately agreed to the proposal. Jump ahead to 2011 and now the POA is asking a bankruptcy judge to help them reduce risk and save cash by granting their request to leave the pension plan, they pushed to join based on the belief that it would reduce risk and save cash. There’s a business moral here somewhere and ideally, the bankruptcy judge is taking this larger perspective into consideration when mulling over his impending ruling.
Defined Benefit vs. Defined Contribution Plans
Since the rise of pension related issues, I’ve received a number of reader queries asking about the difference between Defined Benefit and Defined Contribution plans. Fortunately, we covered this back in 2004 and the definitions provided then are just as useful today:
According to [Richard Wagner, CAP and Senior Manager for Clifton Gunderson LLP], 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”. Richard explained the plans to me this way:
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.
In addition to the article excerpted above, we’ve examined pension issues on several occasions. In one article from 2007, I described underfunded pension plans as an issue that “could turn out to be an orchestra’s Achilles Heel.” Here’s an index of those articles: