Reversions from Pension Plans: History, Policies, and Prospects

Abstract

Defined benefit retirement plans are systematic programs in which employers promise to pay employees a specified benefit at retirement, generally in the form of a life annuity. During the period from 1980 through 1987, employers terminated and recovered assets not obligated for pension benefits from more than 1,635 such plans. The aggregate employer recovery from these terminations amounted to $18 billion, or more than 45% of the plans' aggregate assets. These employer asset recoveries undermine tax incentives designed to encourage employers to establish and maintain pension plans for their employees.

To date, most critics of pension reversions have focused on how reversions undermine society's commitment to retirement income security and are at odds with the economics of labor contracts. In particular, opponents of reversions have noted that benefits paid from terminating plans are paid in nominal dollars even though employees and retirees had reasonable expectations that their benefits would be increased periodically to reflect inflation. Opponents have argued, too, that employees pay for pension contributions with reduced cash wages and thus own the assets of the pension plan.6 This article, however, will attempt to consider pension reversions from the perspective of tax policy issues. These issues have not received the attention they merit and consequently are not as well understood as the aforementioned issues.