More U.S. companies ducking out of their pension promises
By Mary Williams Walsh The New York Times
MONDAY, JANUARY 9, 2006
The death knell for the traditional company pension has been
tolling for some time now in the United States. Companies in ailing
industries like steel, airlines and auto parts have thrown themselves
into bankruptcy and turned over their ruined pension plans to
Now, with the recent announcements of pension freezes by some of
the cream of corporate America - Verizon, Lockheed Martin, Motorola
and, just last week, IBM - the bell is tolling even louder. Even
strong, stable companies with the means to operate pension plans are
facing longer worker life spans, looming regulatory and accounting
changes and, most important, heightened global competition. Some are
deciding they either cannot, or will not, keep making the decades-long
promises that a pension plan involves.
IBM was once a standard-bearer for corporate America's compact
with its workers, paying for medical expenses, country clubs and lavish
Christmas parties for the children. Perhaps most importantly, it
rewarded long-serving employees with a guaranteed monthly stipend from
retirement until death.
Most of those perks have long since been scaled back at IBM and
elsewhere, but the pension freeze is the latest sign that workers in
the United States are, to a much greater extent, on their own.
Companies now emphasize 401(k) plans, which leave workers responsible
for ensuring that they have adequate funds for retirement and expose
them to the vagaries of the financial markets.
"IBM has, over the last couple of generations, defined an
employer's responsibility to its employees," said Peter Capelli, a
professor of management at the Wharton School of Business at the
University of Pennsylvania. "It paved the way for this kind of swap of
loyalty for security."
Capelli called the switch from a pension plan to a 401(k)
program "the most visible manifestation of the shifting of risk onto
employees." He added: "People just have to deal with a lot more risk in
their lives, because all these things that used to be more or less
assured - a job, health care, a pension - are now variable."
IBM said it was discontinuing its pension plan for competitive
reasons, and that it planned to set up an unusually rich 401(k) plan as
a replacement. The company is also trying to protect its own financial
health and avoid the fate of companies like General Motors that have
been burdened by pension costs. Freezing the pension plan can reduce
the impact of interest-rate changes, which have made the plan cost much
more than expected.
"It's the prudent, responsible thing to do right now," said J.
Randall MacDonald, IBM's senior vice president for human resources. He
said the new plan would "far exceed any average benchmark" in its
Pension advocates said they were dismayed at the sight of rich
and powerful companies like IBM and Verizon throwing in the towel on
the traditional pension.
"With Verizon, we're talking about a company at the top of its
game," said Karen Friedman, director of policy studies for the Pension
Rights Center, an advocacy group in Washington. "They have a huge
profit. Their CEO has given himself a huge compensation package. And
then they're saying, 'In order to compete, sorry, we have to freeze the
pensions.' If companies freeze the pensions, what are employees left
Verizon's chief executive, Ivan Seidenberg, said in December that his
company's decision to freeze its pension plan for about 50,000
management employees would make the company more competitive, and also
"provide employees a transition to a retirement plan more in line with
current trends, allowing employees to have greater accountability in
managing their own finances and for companies to offer greater
portability through personal savings accounts."
In a pension freeze, the company stops the growth of its
employees' retirement benefits, which normally build up with each
additional year of service. When they retire, the employees will still
receive the benefits they earned before the freeze.
Like IBM, Verizon said it would replace its frozen pension plan
with a 401(k) plan, also known as a defined-contribution plan. This
means the sponsoring employer creates individual savings accounts for
workers, withholds money from their paychecks for them to contribute,
and sometimes matches some portion of the contributions. But the
participating employees are responsible for investing the money
themselves. Traditional defined-benefit pensions are backed by a U.S.
government guarantee, while defined-contribution plans are not.
Precisely how many companies have frozen their pension plans is
not known. Data collected by the government are old and imperfect, and
companies do not always publicize the freezes. But the trend appears to
As recently as 2003, most of the plans that had been frozen were
small ones, with less than 100 participants, according to the Pension
Benefit Guaranty Corporation, which insures traditional pensions. The
freezes happened most often in troubled industries like steel, textiles
and metal fabrication, the guarantor found.
Only a year ago, when IBM decided to close its pension plan to
new employees, it said it was "still committed to defined-benefit
But now the company has given its imprimatur to the exodus from
traditional pensions. Its pension fund, one of the largest in corporate
America, is a pace-setter. Industry surveys suggest that more big,
healthy companies are doing what IBM did, or will do so this year and
"There's a little bit of a herd mentality," said Syl Schieber,
director of research for Watson Wyatt Worldwide, a large consulting
firm that surveyed the nation's 1,000 largest companies and reported a
sharp increase in the number of pension freezes in 2004 and 2005. The
thinking grows out of boardroom relationships, he said, where leaders
of large companies meet, compare notes and discuss whether a strategy
tried at one company might also work at another.
Another factor appears to be impatience with long-running
efforts by Congress to tighten the pension rules, Schieber said.
Congress has been struggling for three years with the problem of how to
make sure companies measure their pension promises accurately - a key
to making sure they set aside enough money to make good. But it is
likely to be costly for some companies to reserve enough money to meet
the new rules.