Growth and Vesting Changes in Private Pension Plans

DONALD M. LANDAY AND HARRY E. DAVIS*

EDITOR'S NOTE.-Since most members of private pension plans do not remain in a job covered by the same plan until they retire, benefits are often provided to former members meeting certain requirements when they reach retirement age. Most single-employer plans and nearly half the multiemployer plans do this through vesting provisions. In other cases, reciprocity agreements are also used.

After a brief description of the sources of growth of private pension plans in the last 5 years, this article describes the changing prevalence and nature of vesting provisions. Reciprocity agreements, which have been growing rapidly, will be described in a subsequent article.

IN RECENT YEARS, nearly all the increase in private pension plan coverage has been due to the growth of negotiated plans-chiefly multiemployer plans. The smallest proportion of workers in plans with vesting provisions are covered by multiemployer plans-about 1 out of 4.

Therefore, this growth partly explains the slow pace at which vesting provisions have been extended. During the past 5 years the fraction of workers in plans with vesting has increased from 59 percent to 63 percent.

A recent analysis by the BLS of the plans filing annual reports with the Labor Department shows that between 1961 and 1965 multiemployer plans increased at a greater rate than single-employer

*Of the Division of Industrial and Labor Relations, Bureau of Labor Statistics.

plan coverage. Multiemployer coverage grew by nearly one-fourth while single-employer plan coverage increased by about one-sixteenth. Despite their far more rapid growth, multiemployer plans accounted for only 2 out of 7 active workers belonging to pension plans in 1965. (See table 1.)

Slightly more than half the growth of singleemployer plans and more than half the growth of multiemployer plans stemmed from the increased coverage of plans in operation in 1961; the rest was due to the establishment of new plans. The increase among multiemployer plans reflected both the rapid growth of the nationwide plans established shortly before 1961 by the Machinists, Boilermakers, and Operating Engineers and the establishment of new plans by such unions as the Hod Carriers and Woodworkers. The growth of coverage under single-employer plans reflected changes of employment in thousands of enterprises with pension plans, and the establishment of many small plans.

Only one-third of the growth of negotiated plans was due to the establishment of new plans-chiefly multiemployer plans. By contrast, the entire growth of nonbargained plans was due to newly established plans. In fact, the number of workers covered by older plans declined, chiefly owing to terminations and to plans being brought under collective bargaining.

Almost the entire increase in coverage was concentrated in plans without employee contributions. This was due as much to the establishment of new noncontributory plans as to the growth of old ones. A small fraction of the increase was due to the suspension of employee contributions. Neverthe

The industry pattern was about the same in 1967 as 5 years earlier. Approximately 3 out of 5 plans and workers were in manufacturing industries. Major concentrations of pension coverage were also found in contract construction, transportation, and communications and public utilities.

Multiemployer pension programs continued to be most common in the apparel, printing and publishing, and food industries; single-employer plans dominated other manufacturing industries. Most employees in the contract construction, mining, wholesale trade, and motor transportation industries were covered by multiemployer plans. In communications and public utilities, retail trade and finance the majority of employees were under single-employer plans, as shown in table 2. About 7 out of 10 workers were under plans mentioned in collective bargaining agreements. The multiemployer plans, with few exceptions, and most of the large single-employer plans were mentioned.

Employers financed almost 3 out of 4 plans covering the same proportion of workers, about

the same ratio as in 1962-63. Practically all of the multiemployer programs were employer-financed, whereas about a third of the single-employer plans, with about a fourth of the workers, were jointly financed.

The industrial pattern of financing reflected the pattern of bargaining; industries with mostly negotiated plans usually had noncontributory plans and the reverse was also true. Plans in highly organized industries, such as metalworking, and in industries characterized by negotiated multiemployer plans, such as contract construction, apparel, and transportation, are generally employer-financed. On the other hand, employee contributions were frequently required in industries with a significant number of nonbargained plans, such as finance and textiles.

As shown in the previous study, the majority of the employees were covered by large plans. About 60 percent of the participants belonged to less than 3 percent of the programs. Conversely. over three-fourths of the programs each had fewer than 500 members and accounted for less than a tenth of the participants.3

Plan growth was accompanied by an increase in the prevalence of vesting provisions giving qualified workers the right to receive their earned benefits when they reach retirement age although they leave the scope of the plan before then. Vesting coverage, as shown below, also rose:

1 The small changes in the number of plans in certain industries are not statistically significant. See scope and method at the end of this article.

2 See Labor Mobility and Private Pension Plans: A Study of Vesting, Early Retirement, and Portability Provisions (BLS Bulletin, 1407, 1964), p. 52.

Both of these comparisons were based on data from which plans with less than 26 participants are excluded. Since there are thousands of plans this small, the differences between the coverage of large and small plans would be even greater than indicated above. See description of scope and method.

1 Active workers in 1965.

2 Includes agriculture, forestry and fisheries, for which data are not shown separately.

By far the strongest gains were made by multiemployer plans; the number with vesting nearly doubled and the number of covered workers rose by more than a third. The prevalence of vesting in these plans is still far behind that in singleemployer plans. About 3 out of 4 members of single-employer plans belong to plans with vesting provisions, only 1 out of 4 participants in multiemployer plans has that type of protection. Singleemployer plans often made vesting contingent upon the worker's leaving his contributions in the plan or on his being terminated involuntarily.

As chart 1 indicates, the requirements for vesting were liberalized by plans covering several million workers, including many large plans. In 1967, almost 1 out of 5 plan members could qualify for full vesting after 10 years of service, regardless of age, compared with only 1 out of 17 a few years

ago.

The effect of the liberalizations of age and service requirements in the past 5 years is illustrated in chart 2. The chart depicts the probability of 100 workers acquiring vested rights at various ages if they begin working at age 25 in jobs covered by pension plans, selected at random. The contrast in the distributions for the 2 years shown is not as great for older workers as for younger, shorter service workers because the most important liberalization was the deletion in 1964 and 1965 of age

3 Figure does not meet reliability standards.

requirements from plans negotiated by the Auto Workers.

Four-fifths of the workers covered by contributory plans in 1967 had vesting protection compared with three-fifths of the workers covered by noncontributory plans. This disparity results chiefly from the heavy concentration in the noncontributory group of multiemployer plans without vesting. If consideration is limited to single-employer plans, 9 out of 10 workers in contributory plans had vesting compared with 7 out of 10 in noncontributory plans.

Vesting was provided more frequently to workers in nonnegotiated than in negotiated plans. About three-fourths of the workers in nonbargained plans were in plans with vesting provisions, compared with three-fifths of the workers in bargained plans. This difference was largely due to the exceedingly low incidence of vesting in negotiated multiemployer plans, about 1 out of 4 workers. Among single-employer plans, about three-fourths of the workers had vesting both in bargained plans and in nonbargained plans.

Vesting prevailed in manufacturing industries especially in the durable goods sector, where almost 7 out of 10 workers participated in plans with vesting (table 3). Since large proportions of the employees in the transportation, retail trade, mining, construction, and service industries were

covered by multiemployer plans which did not include vesting, fewer than half of the workers in each of those industries were under plans with vesting. Nonbargained white-collar plans predominate in finance, where 3 out of 4 workers were in plans with vesting. Reflecting the influence of the Bell Telephone System plans, fewer than onethird of the workers in the communications and public utilities industries had vesting protection. Instead, these plans have early retirement provisions, which protect accrued benefits for older workers in much the same way that vesting provisions do.

Nature of Vesting Provisions

Three types of vesting provisions are found in private pension plans: Immediate full vesting, deferred full vesting, and deferred graded vesting. About 1 out of 1,000 plans had an immediate full. vesting provision under which benefits are vested as soon as they are earned. Most plans with vesting-about 7 out of 10-had deferred full vesting provisions that postpone vesting until the participant has met certain age, service, or other requirements. The remaining plans had deferred graded vesting provisions under which a member acquires the right to a specified given percentage of his accrued benefits when he has satisfied the minimum age and service requirements. This percentage in

Occasionally, plans pay benefits as soon as the employee is separated, particularly where the benefits are small. But more often payments are deferred until normal or early retirement age.

Deferred full vesting was still the predominant type of vesting in all industries except transportation, in which the Western Conference of Teamsters Pension Trust with deferred graded vesting strongly influenced the averages. Largely because of that plan, about half the workers in multiemployer plans with vesting had deferred graded vesting; the remaining workers had deferred full vesting, as shown below.

Requirements for Vesting

Vesting provisions require the participants to meet certain age or service requirements or both. In addition, vesting may be determined by the type of termination-—whether the employee was laid off or quit.

In addition to service requirements, minimum age requirements-usually 40 years-were specified by about 3 out of 5 plans with deferred full vesting. However, plans covering about half of the workers had no age requirements; they vested the benefits of all workers meeting their service requirement, which was usually 10 years. The number of workers covered by such plans has increased markedly in the last few years, primarily because, the age requirement was abolished in the major plans negotiated by the Auto Workers.

Minimum age requirement 1

Chart 1. Age and Service Requirements for Vesting, 1962-63 and 1967

Percent

Of Requirements 1/ Workers For Full Vesting

No Vesting

9.2

7.9

15.2

5.7

2.7

.8

Other Requirements

Age 40 Or Younger And 11-15 Years Of Service

Age 40 And 10 Years Of Service

1 Where plans specified alternative age requirements, depending on length of service, the youngest age was tabulated.

On the whole, service requirements for deferred full vesting were about the same in plans covering only salaried workers and those covering only production workers; age requirements, however, were more prevalent in salary worker plans. Plans covering 2 out of 3 salary workers had age requirements. By contrast, only about half the members of plans covering production workers and half those in plans covering both salary and production workers were subject to age requirements.

Employees under plans with deferred graded vesting generally qualified at an earlier age, and with less service, to vest part of their equity than those under plans with deferred full vesting. To become fully vested under graded plans, however, usually required much longer service than under most deferred full vesting plans. Ten or 15 years of service were most frequently required to vest the first step of the worker's equity in deferred graded plans.

The amount initially vested usually ranged from 10 to 25 percent of accrued normal pension benefits. To become fully vested, 9 out of 10 workers covered by graded plans had to have 15 years or more of service and often as much as 20 to 30 years. A worker that met the specified age and service requirements usually would be vested regardless

1962-63 1967

1962-63 1967

Any Age And 10

Years Of Service

1 Plans with graded vesting provisions classified by their age and service requirements for full vesting.

2 Plans with graded vesting provisions classified by their age and service requirements for initial vesting.

of the reason for terminating his employment. However, plans covering 1 out of 8 workers-mostly those negotiated by the Steelworkersrequired that the employee be separated involuntarily in order to qualify for his accrued benefits. Value of Vested Benefits

The employee generally receives his vested benefit in the form of a life annuity, commencing at the normal retirement age specified in the plan. The amount of the benefit is determined by the normal retirement benefit formula using the member's credited service and earnings at the time his membership terminates. However, if the plan has a minimum normal retirement benefit, it is usually not used in computing vested benefits. In about 2 out of 3 plans, the benefit was payable only at