The Association of U S West Retirees



IBM to Freeze Pension Program in '08
Shift Includes Enhancing 401(k) Benefits in the U.S., Saves Billions Through 2010
By Ellen E. Schultz, Charles Forelle and Theo Francis 
Friday, January 6, 2006

International Business Machines Corp. said it will freeze its U.S. pension plan in 2008, saving billions of dollars even as it beefs up its 401(k) savings plan for current workers.

The effective deactivation of one the nation's biggest pension plans marks a significant milestone in the gradual but persistent shift away from traditional, defined-benefit plans at major U.S. corporations.  IBM has complained that its pension program, which offers workers benefits based on the number of years they work, is expensive and puts it at a disadvantage to its tech competitors.  Many of its rivals offer only 401(k) savings programs, in which workers and employers contribute to individual accounts that the worker is responsible for investing.

Beginning in 2008, the retirement benefits of the 117,000 IBM employees currently participating in its U.S. pension plans will stop building in value.  The employees can take the money that has built up when they leave the company or retire, but they won't receive credit for additional years of work.  Instead, IBM says it intends to increase the amount it contributes to its workers' 401(k) plans.  The company's 125,000 retirees, and its former employees, won't be affected.

The move could save IBM billions of dollars because removing pension obligations from the company's balance sheet will generate large accounting gains that will boost income.

Like Verizon Communications Inc., which last month froze a plan affecting tens of thousands of managers, IBM says it wants the stability and predictability of using a savings plan, rather than a pension plan, to help workers save for retirement.

"This is the prudent, responsible thing to do going forward," says J. Randall MacDonald, IBM's head of human resources.  "This is clearly about preserving the financial stability of IBM."

Employee advocates say the move is unfair to older workers, who they say will be significantly worse off even with the 401(k) enhancement.

"This is another corporation backing out of its promises," says John Hotz , deputy director of the Pension Rights Center in Washington.  The group says it is disappointed that companies like Verizon and IBM are taking the lead on these moves away from traditional pensions because their plans are well-funded.  The moves will lead to a "race to the bottom" for retirement benefits, the organization says, and millions of employees in these companies and others that will follow won't have enough to live on when they are too old to work.

Indeed, though IBM has complained that it expects higher pension costs in the future, the move isn't a sign that the pension is unhealthy.  Its $48 billion U.S. pension plan has a small surplus, and its liabilities aren't likely to grow significantly because a year ago it closed the pension to new employees.

But the move will produce some immediate financial benefits.  Even though the changes won't take effect until 2008, accounting rules allow the company to immediately start reducing its pension liabilities.  The company said that the actions, combined with other changes it is making or contemplating in plans around the world, would reduce its retirement-related expenses by $450 million to $500 million in 2006, and by $2.5 billion to $3 billion in the period of 2006 to 2010.

The decision to change the pension plans was made at IBM's December board meeting, and the company said it would record a charge of $270 million in the fourth quarter of 2005, because accounting rules require it to accelerate certain expenses that it would otherwise have recorded over time.

IBM says that about 19% of its U.S. employees will see their retirement benefits hurt.  The average affected employee's retirement benefits will fall by 12%, the company says, assuming an average annual pay increase of slightly less than 3% and a retirement age of 58.

In recent years IBM's pension plan has been a lightening rod for controversy.  In 1999 it converted most of its workers to a so-called cash-balance plan, a type of pension that usually results in significant benefit reductions for older workers.  Employees sued, and in 2003 a federal court ruled the company had discriminated against its older workers.  The matter remains in the courts.

IBM's Mr. MacDonald calls the changes "a prudent and balanced step at a time of uncertainty and conflicting legislative and regulatory directions about defined-benefit retirement plans in the United States."

Janet Krueger, a former IBM software employee in Rochester, Minn., who has been active in pension issues, says that she is most concerned that the changes announced yesterday could hurt employees in an older plan whose benefits would stop accruing in 2007 just short of a service milestone.  They "would not be getting that last bump," she says.

An IBM spokesman says that a number of features in the plan would mitigate some negative effects of the changes, and says that people who are close to retirement will be least affected.

IBM says the 401(k) savings plan it provides for its workers' retirement will be redesigned to make it "one of the richest in U.S. business" by giving current pension-plan participants an annual company-funded contribution of as much as 10% of their pay.  IBM says it will match employee contributions to the 401(k) dollar-for-dollar, up to 6% of salary.  Previously it had contributed 50 cents on the dollar.

Write to Ellen E. Schultz at, Charles Forelle at and Theo Francis at