The Long Road to Pension Signals

I struggled with categorizing this post. It’s ultimately about the importance of pension signals that companies and organizations broadcast to their workers. For that reason, I made it a part of the Pension Series. However, I meander through several (somewhat funny) stories, and explain the importance of organizational culture, prior to arriving at pension signals. As a result, I could have placed it in my Life and Money section. In any case, if you don’t have the time to read my well crafted narrative, no worries, just skip to the last two sections. You’ll miss a lot of the context, but capture the main points. On the other hand, if you have time to take the long road to pension signals, please read onwards … which is actually downwards.

Forky, Why Is Grumpus Telling a Story?

Here’s a somewhat funny but nerdy story. I have an anthropology minor attached to my Bachelor’s degree. While I occasionally busted out this knowledge during my military career to examine cultures in Iraq, Afghanistan, and my sister services — by far the hardest of the three — it sat mostly dormant in the echoing hallway that is my mind. It turns out, though, that economists love to use anthropological terms like organizational culture and signaling about companies and businesses. So, for the first eight weeks in my Master in Applied Management (MAM) course, I got to play the spot the anthropological term game.

Based on four months worth of playing that game while reading journal articles (admittedly more than my typical 30 seconds of Googling) I came to the following conclusion: while economists and business scholars love to throw around anthropological terms, they don’t team up with anthropologists to write journal articles. Instead, they appear to prefer teaming with psychologists who explain why individuals behave in certain ways, which in turn informs them about how groups of people act in the corporate and business world.

The Dangers of Anthropology

I can understand why economists and business scholars don’t like pairing with anthropologists. They don’t want a bunch of pith helmet, khaki shorts, and thick boot sock types showing up to some company; gridding out their office space with twine and wooden stakes; and slowly removing the piles of TPS reports layer-by-layer only to determine that the company located on that site 100 years ago supplied their workers with three-ply toilet paper. That’s their loss though because you never know when Harrison Ford is going to show up, kill some Nazis, and save the world. And, as we all know from Indiana Jones, the only good Nazi is a dead one.

What is Organizational Culture?

It seems to me that if you want to explain how groups of people act and why you should ask the people who study groups of people to determine how they act and why. Then again, what do I know? I’m just a broke-dick military pensioner who enrolled in a cheap man’s MBA program so he could move his family to New Zealand. In any case, since organizational culture is an extremely complex issue, and since I just wasted four paragraphs of your time explaining my love of Indiana Jones, let’s use the below definition of organizational culture and call it a day:

The culture of an organization reflects all those elements which are held as norms, the dominant leadership style, the language and conventions, anything that is considered a success or makes the organization unique but is different from the norm preferences of the individual, or from the norms of a nation. (Balogh et al., 2011)

Why Is Organizational Culture Important?

According to my course material, understanding organizational culture provides several benefits because:

• • It influences everything the company does
  • It’s extremely hard to change once established, accepted and communicated
  • It permeates all levels of the organization
  • It’s the main factor that determines employee-organization fit
  • If the fit is right, it can result in high levels of job satisfaction and job performance

The last two reasons are the most relevant to this article and the Golden Albatross theme, more generally. However, considering that I wrote this article at the height of the COVID-19 pandemic, there’s a high likelihood that workers around the world are fully aware of the importance of all the above-listed reasons.

For example, what does a company’s actions during the COVID-19 convey to its employees? Is the employer trying to retain its workers by reducing hours for everyone to avoid laying off anyone? Or, is the organization focused solely on the bottom line? A few weeks ago, one of the podcasts I listen to questioned the decision-making process at publicly traded companies who were still paying out dividends during the pandemic. What does that say about those companies’ corporate culture?

The Culture Club

Numerous methods to label and define organizational culture exist. Still, one of the most popular is the Competing Values Framework developed by Robert Quinn and Kim Cameron. According to them, corporate culture falls into one of four categories: Hierarchy, Clan, Market, and Adhocracy. While many companies display characteristics of all four, one tends to dominate (Maher, 2000). As should be expected from the definition of organizational culture that I cited above, the dominate culture impacts everything. This includes the type of people the organization recruits, to how they treat their employees, and how they interact with customers. So, it’s essential to understand what each culture type means.

The Quinn Association states that Hierarchy culture is:

A highly formalized, structured working environment. Procedures determine what the people do. The leaders are proud of the fact that they are good, efficiency-oriented coordinators and organizers. Maintaining a smoothly running organization is the most crucial thing. Formal rules and policy documents hold the organization together (Quinn Association, n.d.).

On the other hand, Clan cultures value “the long-term benefits of human resource development” (Quinn Association, n.d.). They are flexible, but inward-focused and tend to treat employees like family (Maher, 2000).

As a contrast, in Market culture organizations, “the leaders are drivers, producers and competitors at the same time. They are tough and demanding. The binding agent that keeps the organization together is the emphasis on winning” (Quinn Association, n.d.). Market culture companies are also outwardly focused on beating the competition (Maher, 2000).

Finally, in the Adhocracy culture, “the binding agent that keeps the organization together is a commitment to experimentation and innovation … the organization’s emphasis is on growth” (Quinn Association, n.d.). These companies are outward-looking, as their emphasis on growth indicates, and found in “cutting-edge” fields like technology (Maher, 2000).

No Guts, No Glory

In August 2018, I wrote a post about coping mechanisms called Gutting It Out: What’s Worked For Me … So Far. I wrote it for people who had decided to stay at a job for the pension but felt trapped in their final years before vesting. In October 2018, I followed up that article with the natural counter-argument, The Opposite of Gutting It Out. In that article, I opined as to good and bad reasons for leaving a pensionable job based on observations from my military career and blogging. I also recommended steps to take before leaving.

I like both of those articles, a lot. So much so, that I retooled them into back-to-back chapters in my book, The Golden Albatross: How To Determine If Your Pension Is Worth It. I specifically rewrote them to assist people working in a pensionable career field to determine if staying for their pension is worth it.

Don’t view this as a cheap opportunity to promote my book. I mention these articles because, in the second one, I stated that leaving a pensionable job due to a fundamental clash between your personality/ethics and the corporate culture is legitimate. In contrast, I said that departing because you “hate your job” is not. It was almost a throwaway comment, buried several paragraphs into “The Bad” reasons for leaving section.

When I wrote those two articles, I didn’t realize that a substantial amount of academic literature examining corporate culture and employee mismatch already exists. In fact, there’s a significant amount of scholarly research on just about everything I discuss on this blog. However, let’s stick with organizational fit, signaling, job satisfaction, and how they relate to the worth vs. worth it decision cycle for staying or leaving a pensionable job.

Smoke Signals

Hopefully, you can see where this is going. Only certain types of employees can survive, let alone, thrive, in each of Quinn and Cameron’s organizational cultures. No matter how many coping mechanisms a person deploys in an attempt to gut it out, if they don’t fit the organization, they’re probably not going to last long enough to earn a pension. On the other hand, matching the right type of employee with the right organizational culture can pay enormous dividends for both the company and the employee. This is especially true when it comes to productivity and job satisfaction. But, how do prospective employees, or even current ones, figure out if they fit the culture?

As with many subjects in academia, multiple theories attempt to answer that specific question. One theory suggests that organizations send career culture signals to its employees and prospective employees. Meaning there is a culture within a culture that employees are supposed to pick up on (Hall & Yip, 2016). For instance, new hires made to sink or swim sends a different signal than being placed alongside a mentor. Another theory posits that prospective employees can determine if they are a good fit for a company by judging how well a company showcases its uniqueness during the interview and hiring process (Erickson & Gratton, 2007).

To Know One’s Self

Of course, for any of these theories to work, a worker needs to understand their motivations for working. If you’ve never given serious consideration as to what your job or career means to you, let alone what it does for you, then you’re in luck. Other people did the work for you. I found the below chart in an article in a 2007 Harvard Business Review article written by Tamara J. Erickson and Lynda Gratton entitled What It Means to Work Here.

As you can see from the graphic, people’s motivations for working are varied, and not necessarily static. Several of the above employee types depend on what point a person is at in their life. For instance, are they married? Do they have kids? Or, are they close to retirement?

Square Peg, Round Hole

As already discussed, organizational cultures vary as well. Because of that, organizational and employee fit isn’t straight forward. I’m sure we’ve all worked with someone who clearly didn’t fit into the company or organization. Maybe that was due to a misjudgment on the company’s part when hiring that employee. Or, perhaps the employee’s personal circumstances changed, which changed their motivations for working. In any case, it’s awkward!

On the other hand, you’ve probably met the type of employee that seems a perfect fit for an organization or company. In those circumstances, it probably seems natural that the employee chose that type of organization and vice versa. Maybe that person is even you. If so, congratulations!

Culture Signals

I’ll be honest; I don’t buy all of the overly elegant and complicated portions of the theories explained above. However, my anthropology minor exposed me to signaling theory. Therefore, it seems feasible to me that organizations or companies purposely send cultural signals to their employees, customers, and the general public.

As a case in point, organizations like the military send signals down the ranks on any number of issues relevant to good order and discipline within the ranks. Those signals are often evident and blunt. Other signals in other organizations may be more subtle, like a company quietly trying to hire a more diverse workforce (Thomas, 2004). But here’s the thing about signaling, it takes a broadcaster and a receiver to complete the transmission. Meaning some signals are more important than others to both the broadcaster and the receiver.

Pension Signals

Of course, the primary signal that those of us in the Golden Albatross community care about is the Defined Benefit Pension (DBP) signal. We care about it because it can better inform our decision to stay or leave a pensionable job. It also helps us determine whether or not we can rely on that pension in retirement.

Corporations and organizations may not see the DPB signal in the same light. In fact, according to Quinn and Cameron’s Competing Values Framework, there are only two types of organizational cultures that appear predisposed towards the importance of providing a DBP.  Those are the Hierarchy and Clan cultures. I base that assessment on the fact that DBPs are paternalistic (PwC, 2018; Geddes 2014; AAOA 2016; Benartzi et al., 2011), and the Clan and Hierarchy cultures trend towards paternalism (Giritli et al., 2013). Market culture organizations might also include pensions if it signals that only elite organizations can afford to provide them.

In any case, understanding an organization’s or a corporation’s culture can provide some insight into the types of pension signals they might be broadcasting. Of course, corporate or organizational culture can only go so far before it meets the bottom line. And, as I’ve explained multiple times on this blog but most recently in Part 21 of the Pension Series, DBPs are expensive.

The Lay of the Land with Pensions

As a quick review, let’s synchronize our understanding of DBPs to prepare you to pick-up your company or organization’s DBP signals. According to the U.S. Department of Labor (DOL), DBP plans provide a set amount of money monthly to a retired worker for the remainder of their life. That fixed amount is often derived from a formula which factors in numbers of years worked at a company or government body, and salary (DOL, 2020). The company or organization typically funds the DBP through a pension fund expressly set aside to pay retirees.

In contrast, Defined Contribution (DC) plans do not provide a set amount of monthly income to a retiree. DC plans are funded through a combination of organization contributions on the one hand, and employee contributions on the other. Those contributions are usually directed into tax-advantaged self-directed investment accounts to grow over time through compounding returns. The retiree can then draw on the investment account as needed to fund their retirement (DOL, 2020). It is important to note that in a DBP plan, the pension fund owns the risk of running out of money before for the retiree dies. Under a DC plan, the retiree owns that risk (PwC, 2018).

Again, as I recently researched and shared in Part 21 of the Pension Series, this risk, known as longevity risk, is unpredictable and expensive. In a day and age when people are living longer, it costs a lot of money to pay a person for not working. This is precisely what a DBP fund does when a worker retires, and payouts start. If a DBP plan has health care attached to it, as many do in the U.S., the cost is even higher. And, since DBPs in the U.S. must have a survivorship option, much akin to an insurance policy, the pensioner can pass some of their pension onto a spouse if the pensioner dies before the spouse (Hurd & Panis, 2006).

Do Companies Use Pensions As A Signal?

Surprisingly (to me at least), some global corporations still care about what their workers think, and how they feel, about their retirement package, including a DBP. A 2018 study of 30 global companies with DBP obligations conducted by PricewaterhouseCoopers (PwC) found that they provided retirement benefits (either DC, DB, or both) for any combination of the following four reasons:

1. 1. To provide competitive remuneration
   2. To build good employee relationships
   3. As a mechanism of social responsibility
   4. To manage their workforce

Yet, the PwC study concluded that aside from a few heavily paternalistic or family-owned companies, most global companies accepted the need to transition from DB to DC retirement systems. The researchers noted that most of the companies they surveyed were in the process of managing the DB to DC change-over with varying degrees of success (PwC, 2018).

The Pension Switch Signal

The switch from DBPs to DC retirement plans is an unmistakable signal that corporations or organizations send about the cost and risk of running a DBP to workers. It is not a new phenomenon. The transition from the DBP model to the DC system is well underway in the U.S. (Geddes 2014; PwC, 2018). For instance, in 1989, DBPs covered 32% of the U.S. corporate workforce, but by 2016 they covered just 13% (CRR, 2016). In 1975, there were roughly 103,000 active corporate DBP plans (Sammer, 2016). As of 2017, the most recent year for which there are records, there were 46,698 corporate DBP plans with 13.475 million participants (EBSA/DOL, 2017).

That said, during 2017, those corporate pension funds owned an eyewatering $3.2 trillion in assets and disbursed $243 billion in payments (EBSA/DOL, 2017). What this means is that DBPs are not a total anachronism in corporate America just yet. However, a big reason for that is corporate DBPs left behind massive financial obligations that many companies are presently contending with while they transition to DC plans.

A slower switch is underway in the public sector where significantly larger numbers of workers have access to DBPs. For example, in 2016, a total of 20.9 million former or current public workers had access to DBP plans with a combined total of $3.739 trillion in assets (Census Bureau, 2017). Nevertheless, according to Boston College’s Center for Retirement Research (CRR), as of 2019, 18 U.S. states no longer offered a DBP as their primary retirement program. This number increased sharply after the 2008 financial crash. Furthermore, CRR noted a similar increase from 10.6% in 2001 to 18.9% in 2018 in the sample they track for this purpose (Aubry and Wandrei, 2020).

Don’t Forget The Feds

The U.S. government has also signaled a switch from DBPs to DC plans in certain parts of the executive branch. In this case, I’m specifically referring to the recent transition in the U.S. Department of Defense from the High Three cliff vesting DBP model to the Blended Retirement System (BRS). Other federal workers have had access to both employer contributions into their DC retirement accounts [known as the Thrift Saving Program (TSP)], as well as their DBPs, for years. However, until recently, the U.S. military did not.

For almost 40 years the military pension was an all or nothing cliff vest, where a member either served 20 years and earned the pension, or didn’t. That changed in 2019 when the military started to offer matching contributions to military members for their TSP. The catch is that the DBP on offer at the end of  20 years is now 40% of the average of the highest-paid three years vice 50% for High Three members.

The De-Risking Signal

If you recall, in Part 21 of the Pension Series, I stated that pension plan freezes, lump-sum buyout windows, and wholesale pension risk transfer (PRT) of funds to insurance companies often accompany each other. As a result, workers should view a large-scale pension lump-sum buyout window as another signal. This signal also indicates a company’s or organization’s desire to rid themselves of the risk and cost of a DBP. The De-risking signal is particularly blunt. At the end of the lump-sum window a company transfers part of (or the entire) pension plan to an insurance company. As I covered in Part 14 of the Pension Series, the frequency of this signal continues to increase.

The list of companies that engaged in large scale pension de-risking during the 2010s reads like a who’s who of corporate America. It includes GM, Ford, Motorola, Verizon, and Bristol-Myers Squibb (Secunda & Maher, 2014). And, in 2019, General Electric froze its pension plan for 20,000 active workers and started offering lump-sum buyouts to 100,000 former employees (CNBC, O’Brien, 2019). However, as recently as 2016, Sammer pointed out that reliable pension lump-sum buyout data remained hard to find. She had to rely on data from reinsurer Aon Hewitt, which found:

70 plans offered lump-sums totaling more than $8 billion to approximately 290,000 participants in 2014. Fifty-eight percent of plan participants elected to take deals, with payouts totaling more than $4 billion (Sammer, 2016)

Don’t Forget The Feds, Part Deux

The Trump administration also waded into the lump-sum waters in 2019. They eliminated an Obama era rule that banned pension lump-sum offers to pension plan members already receiving their annuity (Mitchell & Kennedy, 2019). This rule change opened an entirely different avenue to pension funds looking to shed future annuity responsibilities through lump-sum offers. Therefore, it appears that the De-risking signal will continue to broadcast well into the 2020s.

Did You Receive My “Ending Post” Signal?

This article is already too long, so hopefully, you get my point. Organizations and companies send out signals about their corporate and organizational culture routinely. These signals address everything from the type of worker best suited for the company to the value an organization places on its workforce. As an employee, you need to have your antennae tuned to receive them. How you choose to interpret the signals, and what you do in response, is up to you. However, your reaction can tell you a lot about how well you fit your job and organization.

Remember, only paternalistic company or organizational cultures, like Hierarchical and Clan, value DBPs as a remuneration mechanism. However, only a smaller amount can afford them. As an employee with access to a DBP, and possibly struggling with a Golden Albatross decision, you must understand the organizational culture of your employer so you can tune into and understand their pension signals. Many of those pension signals are loud and blunt, like wide-scale pension lump-sum windows. Others are more discreet, like small changes to pension linked healthcare for retirees. As a result, if your DBP is important to you, then it pays to listen for your employer’s pension signals.

Finally, don’t forget these other valuable points that I touched upon in this article.

1. 1. If you want to study how groups of people behave, call an anthropologist
   2. With articles this long, there’s always room for Grumpus to shamelessly plug his book, which can help if you’re stuck in the maw of a Golden Albatross!
   3. Anthropologists like Indiana Jones are especially good at saving the world and leaving behind a trail of dead Nazis, which are the only good kind of Nazis