IBM to Freeze Pensions in 2008

Furthering corporate America’s move away from pensions, IBM Corp. said Thursday that it would freeze its $48-billion pension plan in 2008 and instead enhance its 401(k) benefits for its 125,000 U.S. workers.

Nearly all of IBM’s U.S. employees -- everyone hired before Jan. 1, 2005 -- have pension benefits accruing under a traditional annuity-like plan or a cash-balance plan, which gives workers interest-bearing funds that they can take with them when they leave the company.

But these “defined-benefit” plans are becoming rarer. Companies say the plans carry too many uncertainties, largely because swings in interest rates and investment performance change accounting considerations and the amounts that businesses must contribute to their pension funds in a given year.

Industrial giants such as IBM and airlines that still carry pension obligations say the costs and complexities hamper their ability to compete with younger, more nimble rivals that aren’t saddled with pension obligations.

Beginning in 2008, IBM workers’ pension benefits will be locked in place, based on salary and length of service. The accrual of benefits will stop, meaning future raises or additional years with the company will not signify bigger pension checks upon retirement.

Instead, IBM will increase its contribution to its 401(k) plans. IBM will double the percentage of employees’ contributions that it matches, to 6% of salary; certain employees will be eligible to receive more.

Current retirees will see no changes.

IBM executives said that by no longer having to account for pension accruals that would have mounted after 2008, the Armonk, N.Y.-based technology giant would save $450 million to $500 million this year alone and as much as $3 billion from 2006 through 2010.

The change, however, will result in a $270-million charge in the just-completed fourth quarter of 2005.

The action mirrors steps IBM has taken in other countries, and comes after IBM’s decision to offer 401(k) plans only -- no pensions -- to workers hired after Jan. 1, 2005.

Similarly, IBM rival Hewlett-Packard Co. decided last year to offer only a 401(k) plan to U.S. workers hired this year and beyond.

Patrick Kendall, a pension expert at Diversified Investment Advisors, a consulting firm, said the “hard freeze” that IBM announced Thursday was almost inevitable after the company’s earlier “soft freeze” of closing the plan to new employees.

“I think a lot of these sponsors would like to get out of [defined-benefit plans] entirely, just terminate the plan,” Kendall said.

But many companies find that termination fees and other complications negate that strategy, he said.

IBM shares rose 55 cents to $82.50.