Traditional Pensions Come under Pressure

The Charlotte Observer, N.C

Amber Veverka

January 11, 2004

Jan. 11--Employer support for traditional pension plans is eroding, a new study says, and the uncertainty over how much the plans will cost is to blame.

Nearly 40 percent of 200 employers surveyed by global consulting firm Hewitt Associates said they'll freeze their pension plans if legal and accounting issues with the plans aren't resolved this year.

Companies want Congress to allow them to fund the plans based on a lower interest rate than they have had to in the past. That would let employers sock away less cash for pension needs.

Congress was supposed to address the so-called interest-rate relief issue in 2003 but didn't. While employers wait for action that could come as early as this month, many of them are shifting away from employer-funded pension plans toward employee-funded 401(k)s.

Right now, the pension issue likely matters more to investors than it does to would-be retirees, as companies are forced to divert cash from projects in order to boost pension funds.

But if more employers do stop offering pension plans, as the Hewitt study suggests, workers will be affected. While 401(k) plans, into which workers contribute their own money, allow employees to do their own investing, generally in mutual funds, pension plans offer the security of a guaranteed return.

Among Hewitt's findings:

-- Nearly 60 percent of employers surveyed offer a traditional pension plan (known as a defined benefit plan), either by itself or in combination with another plan, such as a 401(k).

-- 39 percent of the companies that offer a pension plan will either terminate or freeze it if interest rate issues aren't resolved in an employer-friendly way.

Employers have been required to fund plans based on calculations that include the rate on the 30-year Treasury bond. But that bond is no longer even issued, and firms say the rate -- currently about 5.08 percent -- is unrealistically low, forcing them to set aside too much money for future pension costs.

By contrast, corporate bond rates -- the ones many employers want Congress to let them use in calculating their pension contributions -- currently range 5.7 to 5.9 percent, said Howard Silverblatt, market equity analyst with Standard & Poor's. By assuming pension assets will grow at a higher rate, employers would not have to set aside as much cash.

Congress put in place a temporary fix for the interest rate problem, but that fix expired in 2003. Lawmakers are expected to take up the issue again this year.

Companies blame the interest rate issue, along with several tough stock market years, for the underfunding of pensions. The S&P 500 companies' pension plans were underfunded by an estimated $259 billion at the end of last year, compared with $212 billion in 2002.

"Companies are really facing the prospect of these enormously higher liabilities," said James Klein, president of the American Benefits Council, a Washington-based lobby for big employers.

"Companies are telling me they have Wall Street analysts coming in trying to make an assessment of the company, and they want to know what the company's pension expenses are going to be," Klein said.

Without a resolution on how employers must calculate future contributions, companies can't provide that guidance, he said. That unnerves investors.

So far, those investors have more at stake than workers, Silverblatt said.

"Companies have sufficient cash in their till, they have sufficient access to capital markets... to make the (pension) payments," he said. "The money is there. The question is: where does it come from and what are the tradeoffs?"

Labor groups such as the AFL-CIO describe pension plans as "under attack" and have urged support for government policies that safeguard them. Unions also are concerned about employers' move toward cash-balance plans, which are pension programs that tend to benefit younger workers at the expense of older ones. Congress has moved to restrict the plans over concerns that they are age discriminatory, another issue employers said they want revisited.

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(c) 2004, The Charlotte Observer, N.C. Distributed by Knight Ridder/Tribune Business News