January 26, 2005
Cash-Balance Plan Frozen;
Move to Traditional System
Will Reduce Obligations
By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL January 26, 2005; Page A2
In a move that bucks the trend in corporate pension plans and will reduce its pension obligations, SBC Communications Inc. has frozen its cash-balance plan for 55,000 salaried managers and moved them back into a traditional pension plan.
The telecom company, which is expected to announce its fourth-quarter earnings today, initially disclosed the change in a Securities and Exchange Commission filing Jan. 11, and noted it would result in approximately $100 million of noncash charges.
But the company also confirmed yesterday that the move back to traditional pensions will reduce its pension liability and generate gains that will be recognized over time. The company didn't say how great those gains would be.
Traditional pension benefits typically are calculated by multiplying workers' years on the job by their final average pay. That formula provides a benefit that starts slowly but bulks up rapidly in a worker's later years on the job.
Under cash-balance plans, by contrast, an employee's pension benefit grows by a set percentage of pay each year. Companies that adopt cash-balance plans argue that they are better for young workers and people who remain on the job at least five years to qualify for a benefit, because they can build up benefits more quickly and usually can take the money in a lump sum when they leave.
However, moving older, longer-tenured workers to a cash-balance plan can reduce their pensions by 20% to 50%. Companies switching to cash-balance plans reduce liabilities, which boosts their income.
SBC, which converted its management pension plan to a cash-balance plan in 1997, said it is moving back to a traditional pension because it wants to reward longer-service workers. "We wanted to focus our pension resources more in favor of people who are long-service employees, and provide less benefit for those who are not with us a long time," said company spokeswoman Anne Vincent.
Still, the company said the change generally means that unless workers remain until normal retirement age -- a combination of years on the job plus age -- they could see a reduction in benefits.
The cash-balance pensions will be frozen, which means a pension won't grow with additional years on the job, though under law it still earns interest.
While existing employees will participate in the new, traditional pension, many of them won't have many years to build up a benefit. SBC declined to say how the traditional pension would be calculated.
Corporate pension liabilities generally fall whenever companies freeze existing pension plans -- whether they are traditional or cash-balance plans -- because they change company projections of what workers will build up in a plan until they retire. Reversing these estimates usually generates gains that boost income.
SBC didn't have a comment about how much its liabilities would fall, but it has said that it doesn't expect to make any pension contributions in 2005.
Freezing an underfunded pension plan can render it immediately well-funded or even overfunded. It isn't clear whether that is occurring with SBC's pension plan.
The frozen cash-balance plan isn't a separate pension plan; the company is simply changing the formulas for how employees build benefits.
SBC's 100,000 or so union employees, who are covered by traditional pensions, will be unaffected, as will management retirees. New hires will be covered by the new traditional pension.
Write to Ellen E. Schultz at email@example.com
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