Forecast: More Pension Freezes
Companies Shift Retirement Plans, Putting Most of Load on
Workers; Good Time to Put Lid on Accounts
By Ellen E. Schultz, Charles Forelle and Theo Francis, Staff
THE WALL STREET JOURNAL
Thursday, January 12, 2006
Look for more companies to cut back on pension benefits as
an unusual alignment of financial conditions makes such
moves more lucrative than usual.
Two trends have emerged in the broad shift away from
traditional pensions, which provide workers set benefits
based on their salary and years of service. Financially
strapped companies such as airlines and auto makers are
garnering much of the attention as they seek to ditch their
badly underfunded pension liabilities and try to stay
Meanwhile, relatively healthy companies -- many with fully
paid-up pension plans -- are seeking to shift to retirement
programs that put more of the burden for savings and
planning on employees.
International Business Machines Corp. informed 117,000
workers in its U.S. pension plans that they will stop
earning additional benefits after 2007, saving an estimated
$2.5 billion to $3 billion over five years in the process,
including the impact of other changes.
Verizon Communications Inc. froze its pension for 50,500
managers last month, saving $3 billion in the coming decade.
Effective Jan. 1, many workers at
Hewlett-Packard Co. and
Sears Holdings Corp. also stopped building benefits in
their plans. The companies said they are enhancing their
401(k) plans, which typically involve employee contributions
that may be matched all or in part by employers.
Current interest rates offer employers the possibility of a
particularly big income boost if they freeze their pensions,
effectively wiping out part of a debt owed to future
retirees. While assets in a plan still will be paid out when
workers retire or leave the company, benefits don't grow
with additional years on the job.
There is no legal barrier to freezing a pension unless it is
prohibited by a union contract. Verizon, for example,
unilaterally froze the pensions of its managers, but changes
to pensions for its union employees are subject to
"I wouldn't be surprised if many of the largest [companies]
are in fact evaluating" pension freezes, said Vadim
Zlotnikov, chief investment strategist for Sanford C.
Bernstein & Co. Mr. Zlotnikov says the potential for locking
in bigger accounting benefits is one of several reasons big
pension sponsors might choose to freeze a pension now.
Under accounting rules, companies calculate how much they
expect to pay out in pensions over the lives of their
employees, including amounts workers haven't earned yet, and
then reflect that amount as a liability on their books.
When a company freezes its pension -- halting the buildup of
additional benefits for employees -- it is no longer
obligated to make some of the payments it had planned. That
allows the company to reduce the value of the liability it
was carrying on its books, which generates accounting gains
that are counted as income. Although this "income" isn't
money that can be spent, it can affect the stock price and
often management's pay incentives.
Benefits consultants, which earn fees in part by helping
employers restructure pension plans, have begun telling
clients that competitors are considering changes. Hewitt
Associates LLC says that 29% of 152 companies it surveyed
recently were considering closing some of their pensions to
new employees, and 16% of 157 companies said they might
freeze benefit accruals for some or all of current
Today's low long-term interest rates allow companies to lock
in particularly high gains. The value of a future obligation
in today's dollars is bigger when interest rates are low,
because the employer would have to put more money aside at
prevailing rates to meet the payments when they come due.
Short-term rates, which contrary to long-term rates have
been trending higher in recent months, offer the potential
for even bigger gains to companies with so-called
"cash-balance" plans, such as IBM, Verizon, H-P, Sears and
many other big companies. Under these plans, workers have
hypothetical "accounts" to which the employer credits
interest each year, often tied to short-term rates. Higher
short-term rates means higher interest credits. That, too,
raises the pension obligation, and in turn, the savings from
reducing the obligation.
Thus, by freezing their U.S. plans at a time when both long
and short-term interest rates are creating bigger
liabilities, many companies stand to reap a bigger benefit
by reducing their obligation. The companies can lock in the
savings today, even if, like IBM, the benefits won't stop
growing for two more years.
Meanwhile, employers also are worried that proposed
pension-accounting changes proposed by the Financial
Accounting Standards Board might make their profits more
It is impossible to say for sure which companies will follow
in the footsteps of IBM and Verizon. Technology and telecom
companies such as
Lucent Technologies Inc.,
BellSouth Corp. and
Electronic Data Systems Corp., like IBM, Verizon, H-P
and Sears, have cash-balance plans that could generate gains
if frozen in the current interest-rate environment.
Spokesmen at all three companies declined to comment or said
they weren't aware of any plans to change their plans.
Lucent is among those reviewing options, says a person
familiar with the matter.
IBM wouldn't break out the specific effects of freezing the
U.S. pension, but says they account for about a third of its
expected savings from pension changes. Nor would it identify
how much its projected savings are offset by the estimated
cost of increasing 401(k) contributions, which the company
announced last week as well. IBM officials said the company
began examining a pension freeze in earnest sometime early
in 2005, and that the current interest-rate environment
didn't play a role in the decision.
Verizon too, didn't disclose how much of the $3 billion in
savings it expects will come from freezing the pension, nor
would it say how much the savings are offset by increased
401(k) costs. The company declined to comment on whether the
interest-rate environment played any role in its decision;
it said the decision was driven by its merger with MCI,
which didn't offer managers a pension.
An H-P spokesman said the company froze its pension for
competitive reasons. "I wouldn't say [interest rates] played
a significant role," he said. H-P didn't freeze its entire
plan; rather, it closed it to younger employees and new
employees, a move similar to what
NCR Corp., did in 2004. NCR also has a cash-balance
Sears said it froze its plan because traditional pensions
have "become competitively unaffordable," and cause
"significant volatility in a company's earnings and cash
Companies like Sears, which has an underfunded pension, get
cash savings when they freeze their plans in addition to the
pension income that boosts the bottom line. Because the
obligation is reduced, the plan immediately becomes
better-funded, which ultimately reduces or eliminates the
need for the company to make cash contributions to the
pension fund. Freezing its pension reduced Sears's pension
liability by $80 million.
Ellen E. Schultz at
firstname.lastname@example.org, Charles Forelle at
email@example.com and Theo Francis at