Pension-Plan Freezes Likely To Ramp Up Next Year
21 March 2009 - 12:30AM
Dow Jones News
The number of U.S. companies freezing their pension plans this
year will represent the tip of the iceberg compared with the volume
in years to come, according to pension experts.
Although a range of well-known corporations already have frozen
their pensions - including Motorola Inc. (MOT), newspaper publisher
McClatchy Co. (MNI) and insurer Aon Corp. (AOC) - there hasn't been
a deluge of such decisions, which keep earned benefits intact but
effectively bar employees from accruing more in the future.
Actuaries and pension consultants say that many companies are so
focused on resolving their overall business issues in the current
economic climate that they can't focus on major, permanent shifts
in employee benefits right now, but likely will re-evaluate their
commitment to pensions beginning next year.
"When you look back at the last bear market from 2000 to 2002,
the bulk of the uptick in plan closures and freezes happened after
2002. Companies had to deal with their immediate business issues
first before addressing longer-term benefit planning," said Michael
Archer, chief actuary at Towers Perrin. "Right now, most companies
are saying, yes, pension issues are a problem, but we're not
looking to close or freeze plans right away. It's in 2010 and 2011
where we could see higher activity, and get a better handle on the
long-term effects of the downturn."
Right now changes to another type of retirement savings tool,
401 (k) plans, are far more common, most likely because any halt in
company contributions is seen as a temporary measure that can be
relatively easy to reverse in the future. There are also likely
more freezes to come for traditional pension plans, experts agree,
though the level is unlikely to top the pace seen in 2006, when
many corporations decided to change their employee benefits as the
Pension Protection Act (PPA), with a host of new regulations, was
being signed into law.
"If you look back to 2006 and 2007, when a lot more plans were
frozen, there were a few things that were the big drivers," said
Scott Jarboe, a principal in benefits consultant Mercer's
retirement, risk and finance business. "First, there were new
(accounting) rules that drove more transparent reporting of pension
details on the balance sheet. The second and more important issue
was that the PPA was being finalized, and in most cases,
corporations anticipated an increase in plan costs and volatility.
A third, less fundamental issue, was that so many plan sponsors
were freezing their pensions, that it created an opportunity to do
the same and remain competitive," said Jarboe "The activity at that
point was not driven by financially distressed companies," he said.
"The issue we're going to see today is that plan sponsors who may
have reviewed their plan designs and intend to remain committed to
defined benefit pensions may be in such financial stress that they
may have no choice but to freeze versus other more dramatic cost
cutting measures."
There's disagreement among pension experts as to whether this
economic climate will sound the death knell for traditional defined
benefit plans in the years to come. In companies with unionized
workforces, it will be harder to dislodge plans even if management
has the desire. And while the market downturn has clearly exposed
the risks involved with keeping a pension plan during tough times,
there are advantages to having one under better conditions.
"Companies make two assumptions when they provide
defined-benefit pensions: one, that contributions are
tax-deductible; and secondly, companies count on the prospect that
the market will subsidize the cost of the pension during good
years," said Caitlin Long, head of the pensions solutions group at
Morgan Stanley (MS).
Dan Yu, director of Eisner LLP's wealth management division,
says he believes old-fashioned pensions were headed toward
extinction even without the jolt they received from the market in
2008. "I would say, over the next decade, whether we are coming out
of a recession or not, we'll see fewer. Defined benefit plans are
dying dinosaurs. They won't exist in their present form after the
next ten to 15 years," he said.
David Speier, a senior retirement consultant at Watson Wyatt
Worldwide Inc. (WW), says he doesn't think the end is near,
however. "I don't think that's a possibility. There are still
private-sector companies out there that are committed to keeping
defined benefit plans. There will be some that stick it out, even
though we will clearly see more closures and plan freezes. But we
won't be down to zero," he said.
-By Lynn Cowan, Dow Jones Newswires; 301-270-0323;
lynn.cowan@dowjones.com