Pensioners May Find They Are on Their Own
During and after World War II, more and more major U.S. corporations began to make a pact with their employees that was utterly sacrosanct: When a worker retired, he would be handed a pension based on a percentage of the money earned during his career -- no ifs, ands or buts.
Six decades later -- and more than three years into an unrelenting bear market -- that once-inviolable arrangement
appears ready to crumble.
Concern is rising about the liabilities of pension funds in many of the biggest corporations in the land. Plans promising ironclad guarantees of retirement income -- “defined-
benefit” pensions in the argot of accountancy -- have lost hundreds of billions of dollars in the stock market downturn.
The continuing malaise in stocks, along with historically low interest rates, means that the funds are not earning enough to satisfy projected future obligations to retirees.
And that, in turn, is forcing all manner of companies -- General Motors Corp., Boeing Co., Kimberly-Clark Corp. and SBC Communications Inc. among them -- to contribute fresh cash to bring their pension plans closer to the fully funded level.
Serious sums are involved. GM last year pumped an additional $4.8 billion into its pension plan; IBM Corp. contributed an extra $4 billion.
Such cash contributions reduce potential earnings, undermining the potential for company stock prices to rise. Last week, Standard & Poor’s threatened to downgrade the credit ratings of many large companies because of underfunded pension liabilities -- a move that would add to their borrowing costs.
To be sure, a strong economic rebound and a bull market rally that brought equities back to their 1990s exuberance would relieve a lot of the pension fund problems.
Most experts, though, aren’t optimistic that will happen. In fact, rather than be lifted by economic growth, pension funds are more likely to act as “a drag on the U.S. recovery,” says Thomas Hughes, head of asset management at Deutsche Bank.
With the outlook so bleak, one thing is certain: Companies now struggling to shore up their pension funds will try to institute new forms of retirement that relieve them of their long-term obligations -- and shift more risk onto the 26 million active workers still covered by
defined-benefit plans.
“Choices will be introduced to the average 401(k) investor -- real estate funds and emerging- market bond funds,” predicts Robert Arnott, head of First Quadrant, a Pasadena firm that manages pension fund investments. With today’s meager returns on “plain-vanilla stocks and bonds,” Arnott adds, people simply can’t earn enough to finance their retirement.
We have been here before. During the 1970s -- the last time consecutive years of stock market losses afflicted pension funds -- changes gave rise to
defined-contribution plans, including the popular 401(k). (Today, defined-contribution plans total $2.5 trillion, compared with $1.5 trillion for the old defined-benefit variety.) In these cases, workers invest their own money, sometimes with their companies making a match. But there is no assurance of a payoff.
This time around, more than 400 companies are applying to the Internal Revenue Service for permission to convert their
defined-benefit plans to a cash-balance setup, notes Michael Clowes, editor of the trade publication Pensions & Investments. In a cash-balance plan, retiring employees are given lump-sum payments and then assume responsibility for making their own investments for the so-called golden years.
Controversy is brewing about these potential switcheroos because cash-balance plans typically calculate pension benefits on a different schedule that can be a disadvantage to older workers. What’s more, unions tend to oppose any such conversion.
Yet in the long run, the unions are bound to lose. Legislation to overhaul the pension system is fairly certain to pass in the next year or two, leaving corporate balance sheets stronger but employees rolling the dice on their retirement security as never before.
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James Flanigan can be reached at jim.flanigan @latimes.com.
