Law May Hasten Decline of Pensions
When chemicals titan DuPont announced plans last week to scale back its traditional pension program, it became the third large employer to reduce retirement benefits since Congress passed the Pension Protection Act of 2006 on Aug. 3.
The changes had been brewing long before that day. But the flurry of cuts reflect a larger reality: The pension system is in hasty retreat, and little in the new law is likely to stop the trend.
“I think this is the tip of the iceberg. You’ll probably see a lot of companies freeze their plans in 2007,” said Lynn D. Dudley, vice president of retirement policy for the American Benefits Council, whose members include large corporations.
Although the 907-page bill was touted as an effort to stabilize the pension system, Dudley maintains that aspects of the law, along with impending regulatory changes, will only accelerate the demise of old-style pensions that guarantee steady income as long as retirees live.
“Certainly, nothing in this legislation served as an incentive for anyone to keep their plans,” she said. “The American people should know this is a real missed opportunity.”
Delaware-based DuPont, known for generous employee benefits, said its traditional pension would be off-limits to new workers starting next year. In 2008, the company will change its pension formula for current employees, lessening their payouts in retirement.
The move followed pension freezes by Tenneco Inc., an auto parts maker in Illinois, and Blount International of Portland, Ore., which makes outdoor work and industrial equipment. All the companies said they would improve their employees’ 401(k) savings plans.
The cutbacks are just the latest among many by U.S. corporations that are phasing out costly traditional pensions in favor of 401(k) accounts and similar plans that provide retirement nest eggs but don’t guarantee a monthly check for life.
Separately, bankruptcies by major companies such as UAL Corp., parent of United Airlines, have put pressure on the Pension Benefit Guaranty Corp., the federally chartered company that assumes pension obligations when employers terminate their programs.
The Pension Protection Act was designed to address both issues as well as to close loopholes that gave corporations substantial leeway in meeting funding obligations.
Under the new law, companies are expected to fund 100% of their pension commitments, up from 90%. To shore up the safety net for workers, the law encourages employers to strengthen their 401(k) plans and clarifies legal issues to make it easier for companies to convert their pension programs into “cash balance” plans, which are similar to 401(k)s but retain some of traditional pensions’ benefits.
Retirees’ advocates, however, say the stricter funding rules may backfire by encouraging companies to freeze their pension programs rather than bear the burdens of compliance.
On top of that, tougher pension accounting rules are scheduled to take effect at the end of this year. The Financial Accounting Standards Board will require companies to include pension funding obligations in their balance sheets, potentially reducing some firms’ net worth.
“What these changes do is underline the costs that a company has to accept when they sponsor a [traditional] defined benefit plan,” said Charles Ruffel, chief executive of Plansponsor, a trade publisher for the benefits industry. He added: “In order to save defined benefit plans, [the government has] accelerated their demise.”
Companies that reduce their pension commitments often improve their 401(k) savings plans, typically by kicking in more money. Workers are able to take such accounts with them if they change employers, unlike old-style pensions. Employees who job-hop frequently might not be with one company long enough to ever qualify for a pension.
“A lot of people aren’t sure they’re going to spend their whole careers with one company, and they like the idea of a benefit that they can transport to another company,” said DuPont spokeswoman Lori Captain. “The market is changing. There are clear trends moving in this direction.”
Still, some worry that workers will be hurt by the changes. Many employees fail to enroll in 401(k) plans. For those who do, their savings goals can be undermined by poor investment choices or stock market performance. Decisions to withdraw money can hammer the long-term value of the account. Older and less sought-after workers may not enjoy the advantages of mobility.
“What this does is put another big burden on the employees,” said Jim Flickinger, president of the International Brotherhood of DuPont Workers.
The company’s enhanced 401(k) plan, he said, holds more allure for career managers who move from one corporation to another than for factory workers who expect to stay put and have planned on a predictable income in retirement.
“The manufacturing people are the ones who have to take the hit,” Flickinger said.
All agree that the latest corporate cutbacks reflect a worldview in which traditional pensions -- once seen as a way to lock in a loyal and able workforce -- are viewed as costly weights on a company’s competitiveness.
DuPont pointed out that its pension plan changes were likely to boost earnings by 3 cents a share next year and 5 cents in 2008. Blount predicted savings of $16 million to $23 million over the next five years.
Tenneco, which makes shock absorbers, tailpipes and other auto parts, said its pension changes would save $11 million a year before taxes.
“We operate in a very tough environment, a very competitive environment,” said Jane Ostrander, spokeswoman for the company in Lake Forest, Ill. “This is one piece of that ongoing effort to get our arms around these costs.”
In such a climate, the pension bill posed a challenge for lawmakers.
The White House sought much stricter rules to prevent plan failures -- and the possibility that such failures could lead to a taxpayer bailout of the privately funded Pension Benefit Guaranty Corp. Legislators, meanwhile, were struggling to find the balance. Stronger rules were in order, but too much pressure could lead companies to bail out of pensions altogether.
“This bill will not only safeguard the retirement security of millions of working families, it will also protect the interests of taxpayers who could be on the hook for a multibillion-dollar bailout of the Pension Benefit Guaranty Corp.,” House Majority Leader John A. Boehner (R-Ohio) said after Senate passage.
Boehner aide Kevin Smith said criticism from corporations should be viewed in perspective.
“The grumbling from the business community comes as no surprise, since their lobbyists have long argued for more lenient funding requirements for employers,” Smith said. “The president and bipartisan majority in Congress stood by workers and refused to water down the bill.”
Nonetheless, disappointment with the bill, which President Bush signed Aug. 17, is not limited to employers.
“The bill did nothing to prevent companies from dropping out of the system or provide incentives to stay in the system,” said Karen Friedman, policy director of the Pension Rights Center. “That really is the big issue now. How do we keep companies in the ballgame?”
