Wednesday Night #1322 – Postscript on pension plans

DB Plans Rapidly Disappearing: Study

July 12, 2007
An increasing number of corporations are doing away with traditional pensions, according to a new survey. …
The survey was conducted by the industry-supported Employee Benefit Research Institute and Mercer Human Resources Consulting. It found nearly two-thirds of employers offering defined-benefit plans have closed them to new or all employees, or plan to do so in the next two years.

The study shows the rate by which traditional pensions are being phased out is increasing. It also found the trend has extended from troubled industries, like steel, auto and airlines, to healthy companies like IBM and Verizon.

While analysts have long been aware that more employers are shutting or freezing their pension plans, the sharpness of the rise was unexpected by some observers. That is even more surprising, given signs that companies are past the worst of their financial woes of the past several years.

Jack VanDerhei, a Temple University pension specialist, describes it as a watershed event. He says the rate of decline will continue to increase.

According to the survey, companies closing their plans are increasing contributions to company-sponsored 401(k)s to make up for some of the loss to employees. Critics, however, say the increases do not offset the loss of pensions.

Employers had to contribute only about $30 billion a year to cover their pension obligations during the booming 1990s. Following the stock market crash of 2000, that figure rose to about $90 billion a year, and the number of underfunded plans ballooned.

In the past four years, however, the number of underfunded plans has fallen, and analysts say the pension system as a whole is stabilizing.

The study suggests the Pension Protection Act, a law approved by Congress last year to stabilize pensions, has accelerated the trend of closing pensions. Nearly 30% of employers polled said confusion about the law was a factor in their plans to freeze or close their plans, and more than half said they were swayed by the belief that the act would increase costs.

A quarter of respondents closed their pensions to new hires within the last two years, and 12.9% had frozen their plans for all employees. More than 30% plan similar changes in the next two years.

A total of 162 employers were surveyed. According to the study’s statistics, they include some of the largest U.S. companies.

Forwarded by Tony Deutsch from fundfire.com