MANAGEMENT OBJECTIVES IN PENSION PLAN DESIGN

Generally, a primary management objective in designing and maintaining a pension program is to maximize those factors by which the plan improves employee productivity. In other words, to maximize the extent to which the costs of the plan represent investment rather than pure expense. A pension plan improves productivity by attracting and keeping a better work force and providing incentives for good work performance. Although the quantitative evidence for the productivity relationship for specific pension plan features is relatively scanty at this time, there has been much qualitative experience in this area.

Benefit managers and pension planners must begin with an overall idea of what employer objectives can be promoted by a pension plan. While not every potential objective can be met with a single plan—in fact, some are conflicting—it's useful to begin by noting broadly what pension plans can do. Here are the basic objectives:

• Help employees with retirement saving. This is the most fundamental reason for pension plans and it shouldn't be overlooked. Most employees, even highly compensated employees, find personal savings difficult. It is difficult not merely for psychological reasons but also because our tax system and economy are oriented toward consumption rather than savings.

• For example, the federal income tax system imposes tax on income from savings (even if it is not used for consumption) with only three major exceptions: (1) deferral of tax on capital gains until realized, (2) benefits for investment in a personal residence, and (3) deferral of tax and other benefits for qualified retirement plans and IRAs. In other words, a qualified retirement plan is one of only three ways our government encourages savings through the tax system—but it is available only if an employer adopts the plan. (IRA benefits are very limited.)

• Tax deferral for owners and highly compensated employees. While many employees in all compensation categories can benefit from pension plans, owners and other key employees have more money available for saving, have higher compensation, have longer service with the employer, and often are older than regular employees; thus they can benefit more from pension plans. When designing a plan for a business owner, a typical objective is to maximize the benefits for the owner (or, in some cases, to minimize the discrimination against the highly compensated employee that is built into some of the qualified pension plan rules.)

• Help recruit, retain and retire employees. These "three Rs" of compensation policy are important in designing pension plans. The plan can help recruit employees by matching or bettering pension benefit packages offered by competing employers; it can help retain employees by tying maximum pension benefits to long service; and it can help retire employees by allowing them to retire with dignity—without a drastic drop in living standard—when their productivity has begun to decline and the organization needs new members.

• Encourage productivity directly. Certain types of plan design can act as employee incentives; this is particularly true of plans whose contributions are profit-based or those providing employee accounts invested in stock of the employee.

• Discourage collective bargaining. An attractive pension package—as good as or better than labor union-sponsored plans in the area—can help to keep employees from organizing into a collective bargaining unit. Collective bargaining often poses major business problems for some employers.