Over the last 20 years, corporate pension plans have undergone a slow but sure death.
Now, as United Airlines prepares to dump its pension obligations on the federal government in the largest default in U.S. history, it looks like the last curtain is about to fall on traditional pension programs.
Only 20% of the work force still participates in defined benefit plans -- where you get a pension check for life after you retire -- vs. about 40% in the mid-'80s.
Of the 30,000 defined benefit plans left, down from 112,000 in 1985, many are in declining, old-line industries. In contrast, about 700,000 401(k) tax-sheltered savings plans are offered by new and old economy companies.
The government estimates that defined-benefit programs are underfunded by $450 billion.
Of that underfunding, $96 billion is at companies with junk bond ratings. That's up from $34 billion in 2002 and $4 billion in 2000.
"The majority of plan sponsors of defined-benefit plans have underfunded pension plans at this time," said Kevin Wagner, retirement practice leader at Watson Wyatt Worldwide.
Since many of those plan sponsors are financially healthy, their funding obligations will not materially impact their business, he said.
"However, for companies in financial distress, the additional funding requirement may very well be the straw that breaks the proverbial camel's back," Wagner said.
Manufacturers and transportation firms remain those most likely to end their pension plans.
General Motors and Ford debt has recently been downgraded to junk. Delta Airlines has said it may follow United into bankruptcy.
Watchers worry those American institutions might follow former steel giants such as Bethlehem and bygone legacy airlines such as Eastern and turn their pensions over to the Pension Benefit Guaranty Corp. The government insurer will take over United's nearly $10 billion underfunded pension plan.
In 2004, nearly 200 underfunded pension plans were turned over to the PBGC, the most since 1990, when it started counting.
Those moves affected 147,500 workers in 2004. United's four pension plans hit more than 120,000.
When the PBGC takes over pension plans, benefits are often reduced due to legal limits. Of United's underfunded $9.8 billion, just $6.6 billion is guaranteed.
Even so, the PBGC estimates it has a $23 billion deficit, including United. It's backing Bush administration pension reforms, including hiking employers' pension insurance premiums to the agency.
Other recently introduced legislation aims to extend the time airlines can finance their underfunded pensions. Airlines would have to freeze their pension plans and replace future benefits with 401(k)s.
Pension reform isn't likely to stop the steady decline in traditional pension plans, experts said. In fact, higher premiums might push some employers to phase out pensions.
"From 1994 to 2004, half of the defined benefit plans terminated. The vast majority of those plans were well-funded," said James Klein, head of the American Benefits Council.
Those terminations don't include scores of plans frozen or closed to new hires. Such moves can be a precursor to outright termination.
Phasing Out Pensions
Sears Holdings recently told employees it'll cease further accruals to its pension plans after Dec. 31, 2005. Retirees won't be affected.
IBM and Motorola this year stopped offering new hires traditional pensions. IBM had already watered down pension plans for current staff. Avaya stopped accruals to its pension plan at the start of 2004.
"Once large employers no longer cover new hires, it's a matter of time before these plans shrink away," said Sheldon Gamzon, a principal at PricewaterhouseCoopers. Other firms will soon follow suit, he says.
Companies are required by law to kick in money to their pension plans to make up for any shortfalls.
In a rising stock market, that wasn't a problem. Many firms didn't even need to bolster their pension funds in the go-go '90s.
In a down market, even a healthy company might have to make up for the shortfall.
One problem pension consultants see is that companies must use unrealistic interest rates to determine future pension liabilities. Most assume a modest 5.5% return on assets.
"Most pension plans have every reason to expect that their long-term investment return will be 8% or higher," Gamzon said, noting 60% to 70% of pension portfolios are invested in equities.
"If one substituted an 8% rate for the 5.5% rate used, most pension plans would find themselves 90% to over 100% funded," Gamzon said.
"Through the '90s, companies weren't troubled much by (accounting rules) because they were earning pension (asset) returns from 15% to 20% per year," he added.
"But now when returns are significantly below the 1990s, this is becoming a lot more painful," he said. "We're being forced to use low interest rates that don't reflect the long-term expectations of the assets."
The defined-benefit system "is in more dire straits" than Social Security, PBGC executive director Bradley Belt has said.
While Social Security is moving toward a two-to-one worker to retiree ratio, the pension system has just one active employee for each retired or deferred-vested worker, he said.
GM has 2.5 retirees for every current worker. Firms typically replace pensions with enhanced 401(k)s. Avaya decided to chip in 2% of employees' salaries, even for workers who didn't put anything into a 401(k) plan. Avaya also raised its match for workers who do.
Employers say they're offering 401(k) plans because workers job hop rather than stay with one firm.
Competition is a big factor too. Legacy airlines face low-cost rivals without the same pension burdens.
In the 1990s, big U.S. steel companies with heavy pension obligations buckled under to global competition, including lean U.S. minimills.
Many new tech firms never offered defined benefit plans. So big techs with old-model pensions have trimmed back to stay competitive.
"A lot of technology companies offered enhanced 401(k) plans. So we wanted to be as attractive to newer workers as our competitors," said Avaya spokesperson Lynn Newman.
Source: http://news.yahoo.com/news?tmpl=story&u=/ibd/20050525/bs_ibd_ibd/2005525general
Now, as United Airlines prepares to dump its pension obligations on the federal government in the largest default in U.S. history, it looks like the last curtain is about to fall on traditional pension programs.
Only 20% of the work force still participates in defined benefit plans -- where you get a pension check for life after you retire -- vs. about 40% in the mid-'80s.
Of the 30,000 defined benefit plans left, down from 112,000 in 1985, many are in declining, old-line industries. In contrast, about 700,000 401(k) tax-sheltered savings plans are offered by new and old economy companies.
The government estimates that defined-benefit programs are underfunded by $450 billion.
Of that underfunding, $96 billion is at companies with junk bond ratings. That's up from $34 billion in 2002 and $4 billion in 2000.
"The majority of plan sponsors of defined-benefit plans have underfunded pension plans at this time," said Kevin Wagner, retirement practice leader at Watson Wyatt Worldwide.
Since many of those plan sponsors are financially healthy, their funding obligations will not materially impact their business, he said.
"However, for companies in financial distress, the additional funding requirement may very well be the straw that breaks the proverbial camel's back," Wagner said.
Manufacturers and transportation firms remain those most likely to end their pension plans.
General Motors and Ford debt has recently been downgraded to junk. Delta Airlines has said it may follow United into bankruptcy.
Watchers worry those American institutions might follow former steel giants such as Bethlehem and bygone legacy airlines such as Eastern and turn their pensions over to the Pension Benefit Guaranty Corp. The government insurer will take over United's nearly $10 billion underfunded pension plan.
In 2004, nearly 200 underfunded pension plans were turned over to the PBGC, the most since 1990, when it started counting.
Those moves affected 147,500 workers in 2004. United's four pension plans hit more than 120,000.
When the PBGC takes over pension plans, benefits are often reduced due to legal limits. Of United's underfunded $9.8 billion, just $6.6 billion is guaranteed.
Even so, the PBGC estimates it has a $23 billion deficit, including United. It's backing Bush administration pension reforms, including hiking employers' pension insurance premiums to the agency.
Other recently introduced legislation aims to extend the time airlines can finance their underfunded pensions. Airlines would have to freeze their pension plans and replace future benefits with 401(k)s.
Pension reform isn't likely to stop the steady decline in traditional pension plans, experts said. In fact, higher premiums might push some employers to phase out pensions.
"From 1994 to 2004, half of the defined benefit plans terminated. The vast majority of those plans were well-funded," said James Klein, head of the American Benefits Council.
Those terminations don't include scores of plans frozen or closed to new hires. Such moves can be a precursor to outright termination.
Phasing Out Pensions
Sears Holdings recently told employees it'll cease further accruals to its pension plans after Dec. 31, 2005. Retirees won't be affected.
IBM and Motorola this year stopped offering new hires traditional pensions. IBM had already watered down pension plans for current staff. Avaya stopped accruals to its pension plan at the start of 2004.
"Once large employers no longer cover new hires, it's a matter of time before these plans shrink away," said Sheldon Gamzon, a principal at PricewaterhouseCoopers. Other firms will soon follow suit, he says.
Companies are required by law to kick in money to their pension plans to make up for any shortfalls.
In a rising stock market, that wasn't a problem. Many firms didn't even need to bolster their pension funds in the go-go '90s.
In a down market, even a healthy company might have to make up for the shortfall.
One problem pension consultants see is that companies must use unrealistic interest rates to determine future pension liabilities. Most assume a modest 5.5% return on assets.
"Most pension plans have every reason to expect that their long-term investment return will be 8% or higher," Gamzon said, noting 60% to 70% of pension portfolios are invested in equities.
"If one substituted an 8% rate for the 5.5% rate used, most pension plans would find themselves 90% to over 100% funded," Gamzon said.
"Through the '90s, companies weren't troubled much by (accounting rules) because they were earning pension (asset) returns from 15% to 20% per year," he added.
"But now when returns are significantly below the 1990s, this is becoming a lot more painful," he said. "We're being forced to use low interest rates that don't reflect the long-term expectations of the assets."
The defined-benefit system "is in more dire straits" than Social Security, PBGC executive director Bradley Belt has said.
While Social Security is moving toward a two-to-one worker to retiree ratio, the pension system has just one active employee for each retired or deferred-vested worker, he said.
GM has 2.5 retirees for every current worker. Firms typically replace pensions with enhanced 401(k)s. Avaya decided to chip in 2% of employees' salaries, even for workers who didn't put anything into a 401(k) plan. Avaya also raised its match for workers who do.
Employers say they're offering 401(k) plans because workers job hop rather than stay with one firm.
Competition is a big factor too. Legacy airlines face low-cost rivals without the same pension burdens.
In the 1990s, big U.S. steel companies with heavy pension obligations buckled under to global competition, including lean U.S. minimills.
Many new tech firms never offered defined benefit plans. So big techs with old-model pensions have trimmed back to stay competitive.
"A lot of technology companies offered enhanced 401(k) plans. So we wanted to be as attractive to newer workers as our competitors," said Avaya spokesperson Lynn Newman.
Source: http://news.yahoo.com/news?tmpl=story&u=/ibd/20050525/bs_ibd_ibd/2005525general