San Francisco Symphony’s negotiating committee recently probed the financial arithmetic behind defined contribution pensions. According to Dave Gaudry, negotiating committee chair, management wanted future pension improvements to come from a 403(b) plan while the musicians wished to increase the SFS defined benefit plan. The negotiating committee challenged the assumption that defined contribution plans are less expensive, and a joint study with management to compare the relative costs of the plans was undertaken to measure benefit dollar per contribution dollar. Both sides used independent actuaries, and the results were surprising. At the end of the day, management couldn’t find any cost saving at all for a defined contribution plan. The best their actuary could show was that, with identical assumptions, the costs were the same. The musician’s actuary went a step further in pointing out that, in fact, the assumptions are not identical, and that the defined contribution plan provided a much lower benefit for the same contribution dollar. Gaudry says that the reasons for this are simple: longevity risk and investment risk.
The longevity problem can be summed up as follows: Individual 403(b) investors cannot assume they will die at the average age of mortality (84 for a man and 86 for a woman). Defined benefit plans can pool this risk, but defined contribution participants must assume they will die much later, say 95, in order to ensure they will not outlive their savings. According to a study by the National Institute on Retirement Security, this lowers the available benefit dollar by 12%.
The investment risk problem stems from the fact that an individual 403(b) investor is predicted to perform more poorly than the professional managers of defined benefit pensions. A side-by-side survey of 2,000 companies done by Watson Wyatt Worldwide showed that, on average, the defined contribution investor historically has made 1% less annual return on investments than their defined benefit counterparts. In San Francisco the average time from retirement for musician is 14 years, meaning this investment problem would cost 14% overall.
The negotiating committee told management that they were not interested in a plan that provides 26% less benefit for the same contribution dollar (12% longevity risk and 14% investment risk). This argument, combined with management’s concern over the troubled AFM-EPF, gave the leverage needed to maintain and increase the defined benefit plan, even in the current environment where so many orchestras are being pressured to do otherwise.
The current orchestra contract with Lyric Opera of Chicago will expire on May 1, 2012. A comprehensive national search has been conducted to fill the opening left by the retirement of Michael Greenfield, the revered legal counsel of the musicians for more than 45 years. The firm of Moen & Case LLP was chosen to represent the Chicago Federation of Musicians, Local 10-208 and the members of the Lyric Opera Orchestra in contract negotiations for a successor collective bargaining agreement.