Pension plans face more cuts

Defined benefit pensions, which have been on the decline for years, still cover roughly 44 million workers and retirees. But they may become less generous and available to even fewer workers over the next two years, according to an analysis by the Employee Benefit Research Institute (EBRI) and Mercer Human Resource Consulting, which surveyed 162 plan sponsors.
he survey revealed that in the next two years close to 40 percent of pension sponsors expect to close their plans to new hires, while 27 percent plan to freeze benefits for all participants, which means no further benefits will accrue beyond those earned to date. Many workers will need to save more to compensate.

Twelve percent said they plan to reduce the level of pension benefits provided. And 10 percent plan to switch to hybrid plans, which are like 401(k)s except that only the employer contributes to the plan and often guarantees employees a rate of return.

Only 3 percent, meanwhile, said they will terminate their plan, which generally means they will convert the plan's existing assets into annuities for plan participants, and no further benefits accrue.

The Pension Protection Act of 2006 now imposes more stringent contribution requirements on pension sponsors. What the Mercer/EBRI analysis found was that "the higher the expected increase in contribution, the more likely a company is to freeze or close its plan," said pension expert Jack VanDerhei, an EBRI fellow and Temple University professor.

Another major factor influencing companies's plans to change their pensions are new rules from the Financial Accounting Standards Board (FASB), which for the first time required companies to report any pension funding surplus as an asset, or conversely, any underfunding as a liability.

Plan sponsors also are awaiting a second set of changes from FASB, which if they go through are expected to alter the way they calculate their pension assets and liabilities, a move that is likely to increase the volatility in earnings.

"Even for those employers with overfunded plans that don't care about the level of cash contributions (required under the Pension Protection Act) ... you take a 10 percent equity hit (to your pension assets) and that can wipe out a company's operating income overnight," VanDerhei said. "You'll be dead on your bottom line."

On the plus side, said EBRI senior research associate Craig Copeland, when companies do freeze or terminate their plans they often increase their contributions to workers' 401(k)s. Of the employers that have changed their pension plans in the past two years, almost half increased or initiated an employer match, while roughly 33 percent added or increased a non-matching employer contribution, according to the Mercer/EBRI analysis.

Those who said they plan to freeze or terminate their plans also said they would make their defined contribution plans more generous, Copeland said.

The second-phase of the Mercer/EBRI analysis will involve weighting the plans in the survey to better reflect their distribution in the pension world at large.

While the weighting may change the percentages of companies that are likely to freeze their plans, close them to new hires or reduce pension benefits, Copeland doesn't expect them to change that much given how high the unweighted responses were.

"It looks like more and more defined benefit plan sponsors will be changing their plans, certainly for new hires," he said.