USA TODAY: Companies Consider Pension Freezes
January 8, 2004
A resurgent stock market has failed to reduce pension shortfalls, prompting more than a third of U.S. companies with a pension plan to say they'll freeze benefits.
If Congress and regulators do not provide relief, 21% of employers say they will freeze benefits at current levels, according to a survey of more than 200 large companies by consulting firm Hewitt Associates. And 17% say they will halt benefits to new employees.
The percentage of employers offering traditional pensions dropped to 45% in 2003from 83% in 1990as they switched to other pension types and 401(k) plans, Hewitt says. Between January 2001 and October 2003 alone, 13% of more than 1,000 plans reviewed by Aon Consulting had frozen benefits.
Companies are considering pension cutbacks despite big market gains last year, which boosted pension plan assets at companies in the S&P 500 by $112 billion, according to Standard & Poor's projections. That's because the amount of benefits they estimate they'll owe retirees has grown faster than assets, causing shortfalls to balloon.
As a result, the amount that pensions in the S&P 500 are underfunded grew to an estimated $259 billion last year, from $212 billion a year earlier, Standard & Poor's says.
Companies complain that benefit obligations are artificially high because they are required to base calculations on the 30-year Treasury bond, which is no longer issued. Though interest rates are generally low, the rate used for the 30-year Treasury bond is lower than corporate bond rates. Low rates cause estimates of future pension obligations to soar.
Lawmakers had been near an agreement on a temporary pension relief bill. It would have allowed companies to use a corporate bond rate for two years. But Congress adjourned for the year without passing it.
Even without legislation, the bond market has taken some pressure off pensions, says Howard Silverblatt at Standard & Poor's. Rates on the 30-year Treasury bond bottomed in June at 4.14%, vs. 5.18% now, he says.
The shortfalls are primarily a concern for investors because the money to fund pensions often cuts into capital expenditures, Silverblatt says. Most companies have sufficient funds to meet their pension obligations, he says.
Still, companies may be more inclined to consider freezes now because it can be hard to pass legislation in an election year, says Nevin Adams, editor of Plansponsor, an industry publication.
Many firms would like to convert their traditional pensions to so-called cash-balance plans, which are more portable, accumulate more evenly and can be less expensive. But regulators and Congress are at odds over rules on the conversions.
The article originally appeared in USA TODAY on January 7, 2004 written by Christine Dugas.
