How Safe Is
Freeze of IBM Plan Leaves Workers Worrying If Their Employer Is
Next; Who Is Most Vulnerable
By Ellen E. Schultz and Theo Francis, Staff Reporters
THE WALL STREET JOURNAL
Thursday, January 12, 2006
International Business Machines Corp.'s plan to freeze its
$48 billion pension sent a chill through workplaces across the
nation, with employees questioning whether their own benefits
were also at risk.
IBM is the latest in a litany of corporations that have
announced pension freezes in recent years, including
Verizon Communications Inc. and
Sears Holdings Corp. The actions mean that even though
workers will get their pensions when they leave or retire, their
benefits won't grow with additional years on the job. IBM
instead increased contributions to its employee 401(k)
So far, there hasn't been a mass exodus by large companies from
pension plans. Although smaller companies have been scaling back
pensions in favor of 401(k) plans for years, two-thirds of
companies that make up the S&P 500 still have pensions.
In the first comprehensive government study of frozen pension
plans, the Pension Benefit Guaranty Corp. last month said that
nearly one in 10 pension plans at private employers had halted
accruals to at least some participants as of 2003, the most
recent year for which complete data are available. But most of
these cuts were at companies with fewer than 100 participants,
and represented only 2.5% of total pension participants in PBGC-insured
plans, the study found.
Still, a number of factors make it likely that more large
companies could put the brakes on pension benefits soon. What's
more, this is likely to happen even if the companies and their
pension plans are financially healthy.
Here are some answers to questions confronting employees:
In a "hard freeze" like those at IBM and Verizon, all
participants stop earning benefits. The assets remain in the
pension and will be paid out when the workers retire or leave
the company, but the workers' benefits don't grow with
additional years on the job. It's as if the affected employees
had changed jobs and stopped building a pension at their former
employer. So far, relatively few large companies have done this,
Circuit City Stores Inc., Sears and hospital-products firm
More common are "partial freezes," such as closing the pension
to new workers, which is something
Lockheed Martin Corp. and
Aon Corp. have done, or to workers under a certain age, as
NCR Corp. has done.
Companies often freeze their pensions in stages. Sears froze its
pension as of Jan. 1. But in 2004, before its merger with Kmart
Corp., Sears stopped offering pensions to new workers and cut
off existing employees below age 40 from building benefits.
are companies freezing pensions?
Companies say they're trying to become more competitive and
adapt to changing times. Some, including technology firms like
Hewlett-Packard Co. and IBM, say they must compete with
younger companies that never made pension promises, or foreign
companies where the government provides significant retirement
GAUGING YOUR RISK
Workers in many industries
are concerned that their employers will put the brakes on their
pensions. Here are some groups that are most at risk:
• People in companies with a large percentage of older, longtime
• Managers and other employees not covered by a
• Employees whose companies have already cut some retiree
benefits in the past. These firms are most likely to do so
But freezing pensions can bolster a company's profit, too.
Because workers stop building pensions, the company gets to
reduce a liability it has already recorded on its books that
represents the promise to pay their future benefits. This
generates accounting gains that boost income, at least on paper.
Berkshire Hathaway Inc. froze the pension of a subsidiary
effective Jan 1. The company recorded a gain to income of $70
million when it announced the move in 2004. A Berkshire
executive didn't return a call seeking comment.
In short, thanks to the accounting rules, companies can realize
income from cutting benefits they haven't paid. That could
encourage employers to cut or freeze pensions even when the
plans are fully funded and don't require any additional
contributions from the companies.
This turns out to be an opportune time for companies to freeze
pensions, for a variety of reasons. For one thing, people aren't
surprised: Financial crises at steelmakers and airlines, several
of which have actually abandoned their pensions, mean people are
used to hearing about a "pension crisis." Also, as more
companies in a certain industry end pension benefits, rivals can
argue more persuasively that they need to stay competitive.
Moreover, thanks to arcane accounting rules, low, long-term
interest rates mean the accounting benefit for freezing a
pension is higher than it would be if long-term rates rise as
most vulnerable to a freeze?
Salaried employees are most vulnerable. Companies typically have
to negotiate to cut benefits for workers covered by a
collective-bargaining contract. Companies can't cut or revoke
pension benefits already earned, but employers are generally
free to freeze plans for nonunion workers at any time.
gets hurt the most?
Workers who have been at the company many years -- especially in
their 40s and 50s -- could end up with substantially less money
than expected. Traditional pension benefits build up fastest in
an employee's final years at a company. That's because benefits
are typically calculated by multiplying years of service by the
average salary in the final years, when pay usually is highest.
As much as half of a person's pension is earned in the last five
years on the job. Even with bigger 401(k) contributions, these
workers may never catch up.
Retirees aren't affected by freezes. Younger workers and those
who switch jobs frequently also will be less affected.
an enhanced 401(k) help?
Something is better than nothing, but employees whose companies
switch to a 401(k), even one with more-generous benefits, could
well prove worse off than with a pension. Investing their
savings themselves means that just a few years of bad returns
could leave them with no time to recover -- and a poorer
What's more, there's nothing to stop employers from cutting the
401(k) contribution in the future. "They have the discretion to
change those contributions at any time, whereas they really
didn't have that" with the pension, says Jay Hanson, national
director of accounting for Minneapolis-based accounting firm
McGladrey & Pullen LLP.
if I'm in a cash-balance plan?
Many companies, including IBM and Verizon, are freezing their
cash-balance pension plans. In these plans, employees' benefits
grow by a percentage of their pay plus interest each year. These
employees have faced multiple freezes of their pensions. When
companies converted to these plans from a traditional pension,
they froze the benefit buildup under the traditional formula,
which reduced the pensions by 20% or more. What's more, the
cash-balance pension was also effectively frozen for many older,
longer-service workers. That's because they started with an
account balance in their new pensions that was lower than the
value of their former pensions. As a result, their pensions
didn't grow until their annual cash-balance plan credits built
up to the level of their old benefit, a phenomenon called "wearaway."
freezing different from terminating a pension plan?
When employers terminate a pension, they must pay out all of the
benefits immediately, either in lump sums or by buying each
worker an annuity. With rare exceptions, only companies
operating under bankruptcy protection can dump unfunded
liabilities on to the Pension Benefit Guaranty Corp., the
government-run insurer that guarantees private-sector pensions.
For all of the media attention about companies terminating
underfunded pensions, it isn't common. Fewer than 2% of the
plans that were terminated from 1986 to 2004 lacked enough money
to pay every employee's pension, according to the PBGC.
Ellen E. Schultz at
email@example.com and Theo Francis at