Workers in an ongoing DB plan only  receive benefits if they are vested. We note further  that some sponsors of CB plans have already exited the DB system, a  system that has been declining in sponsorship and participation for several  decades now. Analysis of lifetime benefits under a conversion to an  equal cost CB plan does not change basic findings. Research Provides Limited Evidence to

		Data and other methodological issues

Data and other methodological issues (e.g., sampling  methods) limit generalization of results. Conversion impact depends on a variety of factors  including plan generosity, transition provisions, and firm  specific employee demographics. Also, because of the different accrual patterns in a CB  plan compared to a FAP plan, for a variety of workers,  the impact of a conversion varies. Research Provides Limited Evidence to Generalize About CB Conversions, cont. Why sponsors convert to CB plans. CB plan conversions have distributional effects on pension   Younger, more mobile workers who vest usually benefit. Older workers with long job tenure likely to experience a  loss, particularly if they are near age and service  requirements for early retirement. About Half of Plans Offered Some Form

		Grandfathering was offered in 47% of all conversions

and in 55% of the largest converted plans, although  most of these provisions had some form of age or  service restrictions. Plan Characteristics: Cash-Balance Plan

	Typical CB Plan Conversion vs. Terminated Typical

Regardless of age, all vested workers who converted to  a typical CB plan experienced monthly benefit increases  compared to a terminated FAP plan. Grandfathered benefits for those  eligible under the CB plan greatly impact results shown  for older workers. More workers converted to an equal cost CB plan from a typical  FAP at age 30 receive greater present value of lifetime benefits through conversion than would at later conversion ages. Outside of grandfather protections, results show a redistribution  of benefits from older workers to younger workers. Because a range of  factors that are unique to each conversion influence the final impact on  workers—including demographic characteristics, the transition benefits  offered during the conversion and the generosity of the new CB plan  relative to the old plan it is replacing—it is difficult to extend the results of  the literature to the actual experience of workers. However, some research  suggests that the retirement benefit implications due to a shift to a less  generous CB plan differ materially from the effects of a cost-neutral  conversion. Mellon Financial Corporation. Survey of Conversions from Traditional  Pension Plans to Cash Balance Plans. 2002. Description of the Review

After obtaining Form 5500s, attachments, and summary plan descriptions  where available for sampled plans, we recorded plan features on a  standardized instrument containing 51 questions designed to capture  information about    characteristics of the traditional DB plan, such as the conversion date  and the type of DB plan in place before the conversion;  the conversion such as when it took place, which employees were  affected, and the type of transition provisions used; and  the ongoing features of the CB plan, such as pay credits and interest  credits provided at the time of conversion. Appendix IV: Analysis of Simulated Cash Balance Plans and Traditional Final Average Pay Plans

To analyze the effects of a CB plan conversion on individual workers, we  used a pension policy simulation model PENSIM. An annuity loading  fee was used such that it ensures the provider is solvent (i.e., 1.5  percent for women and 3.0 percent for men);     at conversion, opening account balance is equal to the statutory  present value of accrued benefit under old plan;     at conversion, employee with age plus service greater than or equal to  60 is grandfathered in old plan so that benefit at job end can never be  lower than it would have been if the old plan had continued operating  The equal-cost CB plan has the following characteristics    same characteristics as the typical CB plan except the base pay credit  is 7.35 percent of salary for employee with age-plus-service (APS) ≤ 35,  rather than the 3.0 percent of salary in the typical CB plan, and    pay credit rises gradually until it reaches a maximum of 6 percentage  points above the base pay credit for employee with age plus service  greater than or equal to 70. Most of the study analysis focuses on  those who have vested in at least one private-sector FAP or CB plan. Employer Cost Estimates

The employer cost of sponsoring a pension plan is defined as the  percentage ratio of the present value of benefits paid to all individuals who  worked on a job where that pension plan was sponsored and the present  value of earnings paid to all individuals who worked on a job where that  pension plan was sponsored.
Why GAO Did This Study

The nation's private defined benefit (DB) pension system, a key contributor to the financial security of millions of Americans, is in long-term decline. Since 1980, the number of active participants in Pension Benefit Guaranty Corporation (PBGC) insured single employer DB plans has dropped from 27.3 percent of all national private wage and salary workers in 1980, to about 15 percent in 2002, and more recently the PBGC has assumed billions of dollars in unfunded benefit obligations from bankrupt plan sponsors. Some analysts have identified hybrid DB plans like cash balance (CB) plans as a possible means to revitalize this declining system. However, conversions from traditional DB plans to CB plans have sometimes been controversial because of the effect conversions may have on the benefits of workers of different ages. As House and Senate committees consider comprehensive pension reform legislation that includes efforts to resolve uncertainties about CB plans, GAO was asked to (1) review current research about the implications of CB conversions for employee benefits, (2) describe the prevalence and type of transition provisions used to protect workers' benefits in past CB conversions, and (3) estimate the effects of CB conversions on the benefits of individual participants under a hypothetical conversion to a typical CB plan from a typical traditional DB plan.

What GAO Found

Current pension and economic literature provides little conclusive evidence about the effects of CB plan conversions on benefits. In many cases, data and other methodological issues (e.g., sampling methods) limit the generalization of results. Nonetheless, cash balance research indicates that the effects of a conversion depend on many factors, including the generosity of the CB plan, transition provisions that might limit any adverse effects on current employees, and firm-specific employee demographics. CB plan conversions are posited to have distributional effects on expected pension wealth: younger, more mobile workers usually benefit while older workers with long job tenure are likelier to experience a loss, particularly if they are nearly eligible for early retirement. GAO's analysis of a representative sample of plan conversions determined that most conversions occurred between 1990 and 1999 and primarily in the manufacturing, health care, finance and insurance industries. Most conversions set participants' opening account balances equal to the present value of benefits accrued under the previous plan, although the interest rate used to calculate the balance varied around the 30-year Treasury bond rate. Most plans provided some form of transition provisions to mitigate the potential adverse effects of a conversion on workers' expected benefits for at least some employees. About 47 percent of all conversions grandfathered at least some of the employees into the former traditional DB plan. In most cases, grandfathering eligibility was limited to employees meeting a specified minimum age and/or years of service. GAO's simulations of the effects of conversions on pension benefits show that in conversions from a traditional DB plan to a typical CB plan, most workers, regardless of age, would have received greater benefits under the DB plan. Unless grandfathered into the former plan, older workers experience a greater loss of expected benefits than younger workers. Further, in comparing a typical CB plan to a terminated FAP plan, all vested workers would do better under the CB plan. Also, in conversions from a traditional DB plan to a CB plan of equal cost to the sponsor and more generous than the typical CB plan, while more workers at age 30 have benefit increases under the CB plan, this was not true for those at age 40 and 50. Moreover, in comparing a equal cost CB plan to a terminated FAP plan, again all vested workers would do better under the CB plan. Finally, GAO's comparisons focusing on the lifetime present value of benefits did not change the basic findings of GAO's analysis of monthly benefits.