Pension Abuses

Pension Abuses

admin / January 13, 2019

Introduction

In traditional times, the welfare of the elderly was taken care of by the tightly knit family set up in which they lived. However, the structure of the community has largely changed and this traditional set up seldom exists. This combined with the fact that we are living in a time where the average life-span has significantly lengthened therefore leading to the presence of a significant aged population has resulted in the need for an apparatus to guarantee the welfare of the elderly.

Pension schemes present such a platform since they create a means through which the elderly who suffer diminishing power can acquire some form of economic and social security (Blackburn 4). Consequently, the issue of pension benefit remains on the foreground of many governments’ policies as increased benefits of security in retirements is sought after.

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However, the issue of pension abuse threatens the very foundation of the pension institute. Considering the significant role that pensions play in the lives of the elderly, it is important that these abusive practices be contained. This paper shall set out to provide an informative discussion on the history of pension abuses in our country. The manners in which these detrimental practices can be prevented will also be explored.

History of Pensions

Pension funds are in essence an “agreement by a sponsor to provide income to participants upon their retirements” therefore guaranteeing their well being after they are out of the work industry (Blackburn 5). While the earnings made in the pension scheme are significantly less than those made while in employment, they ensure that the retired person can live comfortably without working.

Jeszeck documents that over 50% of the private sector workforce participate in some form of pension scheme (6). As a result of this, the pension industry has gained such prominence in modern life that those who manage pension products have become big players in the financial world.

Pension funds are vulnerable to fraud and corruption mostly because of a flawed enforcement policy that results in abuse by those who are responsible for the funds (Ferguson and Blackwell 92). As of 1950, the government implemented the Pension Plans Disclosure Act which was meant to ensure that pension plans disclosed more financial information to the Labor Department and to the plan participants (Howard 124).

In recognition that employers had too much power over the pension funds, congress in the 1970s sought ways to reduce this. The formation of the Pension Benefit Guaranty Corporation which was responsible for regulations governing vesting and funding standards was set up. This body required the reporting and disclosure of pension plans by the employers.

The Employee Retirement Income Security Act of 1974 resulted in the Department of Labor being charged with the task of administering and enforcing fiduciary requirements, an act which resulted in the fragmentation of the pension interests therefore ensuring that no one body could exploit the pension funds.

Defined benefit pension plans must meet the requirements set by the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 and the Pension Protection Act (PPA) (Sipe, Metrejean and Donaldson, 177). The most recent act, the PPA is particularly significant since it obligates companies to ensure that their pension schemes are fully funded and if not, penalties are imposed on the said companies.

Pension Abuse

The American system allows companies to manage their employee’s pension funds in whichever way they deem appropriate. While it is assumed that the organization will have the employee’s best interest at heart, this is not always the case and there are instances whereby the company uses the pension funds in ways that are beneficial to the company but detrimental to the employees.

Perhaps the best example of such behavior is the Enron scandal in which the company utilized money from employee pension funds to inflate its share capital (Blackburn 202). When the Enron scandal was made public, the share prices of the company plummeted and as such, employee pension plans could no longer be paid.

Pension funds are often invested in company shares which makes them open to falling prey of corporate greed and indulgence which has resulted in the collapse of many companies in America. Many U.S. corporations are notorious for their extravagant top executive compensation schemes.

The motivation for this is to align the interests of executives with those of the shareholders therefore resulted in huge profits for the company through rising share valuations. This set up often results in executives looking for ways to boost share prices so that they can benefit themselves.

This short-term boost might have a negative effect on the long-tern health of the company which constitutes fraudulent behavior (Blackburn 202). The cost of this share price manipulation by executives will affect the employees who have invested their pensions of the same company.

Another danger that pension schemes suffer from is pension buyouts by financial entities. Purcell, Orszag and Net reveal that buyouts create new risks that could adversely affect the welfare of the workers (137). In addition to this, such buyouts results in the creation of a third-party sponsor who does not have an incentive to manage the plan in the interest of the employees.

This is as opposed to a pension scheme that is sponsored by the company which will have an incentive to properly manage the plan so as to maintain a good working relationship with the employees.

Prevention of Abuses

Blackburn asserts that while a good pension scheme can help reinforce a healthy and sustainable economy, a bad one results in economic dangers and social dis-tempers (4). Pension fraud results in a bad pension scheme and therefore threatens the economy and social harmony.

It is therefore of uttermost importance for means to be sought through which pension fraud can be prevented altogether or mitigated at the very least. Stewart reveals that most workers are highly exposed to risks such as insolvency by the plan sponsors.

Owing to the significance of pension funds to the lives of the people who make the investments, it is of great importance to ensure that the said funds to no fail.

One of the manners through which this can be ensured is through Pension Benefit Guarantee Schemes (PBGS). Stewart articulates that PBGSs are insurance type arrangements which “take on outstanding obligations which cannot be met by the insolvent plan sponsors (2). Such safeguards are especially vital in a volatile market where the health of a company may not be guaranteed.

The PBGS in recent years bailed out over 4000 failed pension plans therefore ensuring that the employees who had been investing in the fund were not affected by the plans failures (Sipe, Metrejean and Donaldson, 186).

Another proposed solution for ensuring that pension abuse does not occur is by imposing of strict rules that ensure that the pensions are at all times funded. Stewart reveals that in Dutch where such a system has been adopted, all pension funds are required to have a certain minimal percentage of funds at all times (9).

While it has been demonstrated that having a 100% funded pension may not be feasible as a result of deterioration of investment returns and other unexpected outcomes, the higher the percentage of minimal funding the lower the risks of a the pension fund collapsing.

The U.S. also has such a policy in place through the PPA which not only dictates that pension is fully funded but it also increases the disclosure requirements for employers funding private pension funds.

Conclusion

Given today’s economic realities, it is important to ensure that the pension funds are safeguarded from fraud. This paper set out to give a brief history of pension funds, the abuses that can be perpetrated against the funds and possible preventions. From this paper, it is evident that pensions continue to be vulnerable as a result of fraudulent behavior by the funds managers as well as little policing efforts to ensure that the funds are kept in the right order.

This paper has outlined the various methods which can be used to perpetrate abuses of pensions. All this methods result in the employees losing a significant or even all of their pension. However, proactive steps have been taken so as to ensure the prevention and detection of pension fraud.

These methods such as the PBGS and the PPA is properly implemented will result in the safeguarding of pensions from fraudulent persons. This will not only ensure the protection of the future welfare of the employees but it will also have a positive impact on the country’s economy.

Works Cited

Blackburn, Robin. Banking on death: or, investing in life: the history and future of pensions. Verso, 2003. Print.

Ferguson, Karen and Blackwell, Kate. The pension book: what you need to know to prepare for retirement. Arcade publishing, 1996. Print.

Jeszeck, Charles. Retirement income: challenges for ensuring income throughout retirement. Diane Publishing, 2010. Print.

Sipe, Stephanie. Metrejean, Cheryl and Donaldson, William. “Defined Benefit Pension Fraud: A ticking time bomb.” Journal of Forensic & Investigative Accounting Vol. 2, Issue 2.

Stewart, F. “Benefit Security Pension Fund Guarantee Schemes”. OECD Working Papers on Insurance and Private Pensions, No. 5, OECD Publishing.

Purcell, Patrick and Orszag, Peter. Underfunded pensions, pension dumping and retirement security. The Capitol Net Inc, 2009. Print.

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