Pension Plans on Last Legs, Observer Says : Retirement: Changes in tax status have led to an increase in the number of plans folding. People are turning to annuities and other investment vehicles.

The private pension system, which for years has been a major source of retirement protection as well as investment capital for the economy, is in decline as workers and employers turn to other savings vehicles.

“The U.S. private pension system is being torn down,” said Howard Weizmann, executive director of the Assn. of Private Pension and Welfare Plans.

“The system is dying, and we are watching it die,” Weizmann said at a conference this month.

While others insist that the decline of the pension system is greatly exaggerated, Weizmann said changes in the tax treatment of pension plans and increasingly complex regulations have led to an increase in the number of pension plans folding and a decline in new plans created.

The gloomy picture for the future of pension plans was further clouded by last week’s Supreme Court ruling that federal regulators can order corporations in bankruptcy protection to restore abandoned pension plans.

Industry officials fear that the decision, against Dallas-based steelmaker LTV Corp., will cause more companies to close their pension plans.

“The LTV decision by the Supreme Court tells us that this social service cannot be denied based on an individual business’s condition,” said Willis Goldbeck, president of the Washington Business Group on Health, which lobbies for businesses on health issues. “Employers have to come to grips with the new ideology, that this protection is no longer a benefit but a right.”

One way employers appear to be coming to grips with this issue is by shutting down their plans or not opening any new ones, Weizmann said.

Last year 15,856 so-called defined-benefit plans were terminated, an increase of 37% from 1988, while only 5,461 plans were created, a decline of 67%, Weizmann said.

“We have scared people out of this system,” he said. “Is this price worth paying?”

The defined-benefit plans are particularly significant because they helped fuel the stock market boom of the 1980s. But in part because of increased regulations, most new plans are defined-contribution plans, under which a certain amount of money is set aside for each employee every year.

By law these plans must be much more liquid, and so do not have the investment clout of the defined-benefit plans, which guaranteed a certain payment level for each retiree.

Weizmann noted that by the end of 1987, private pension plans held $2 trillion in assets. This is equal to 32% of the U.S. gross national product.

“A 24% share of the U.S. equity market belongs to pensions, and pensions supplied 34.8% of the investment capital provided by all non-banking institutions,” Weizmann said.

Private pension plans also account for 51% of all new savings in the United States, he said.

“But we are at the high water mark of the U.S. private pension system,” Weizmann said. The growing trend toward defined-contribution plans is a way for corporations to avoid the regulations involved in traditional pension plans, he said.

Individuals are also turning to annuities and other investment vehicles such as individual retirement accounts, instead of pensions.