No Pension, No Future ..... No Shit ...
Margo Bryerton, 56, a Verizon network service manager based in Syracuse, N.Y., had a rude awakening when she came to work on Dec. 5. That day, Verizon announced it was freezing its pension plan. As part of a move expected to save the company $3 billion over 10 years, the telecommunications giant announced that managerial workers would no longer earn pension benefits after June 30 this year.
Because of the way such traditional defined benefit pensions are calculated—generally as a percentage of the salary earned during the last several years of service—the freeze will take a big bite out of Bryerton's anticipated pension. The 17-year veteran says that if she retires at 65, she'll have about $300,000 less than she expected. "I have a job I love and make pretty good money," she says. "But I no longer have financial security."
The move to freeze pensions at solid, profitable companies like Verizon—and at others, including IBM, Sprint, Nextel, Tribune Corp., Lexmark, Alcoa and Russell Corp.—is the latest sign of pressure on traditional guaranteed pension plans. "It's an entirely new phenomenon for healthy companies to freeze their pensions," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
In 2003, 41 percent of workers with pension coverage had defined benefit pensions, down from 83 percent in 1980, according to the latest data released in February by the center. For the last several years, employees in struggling industries such as airlines, steel, coal and textiles have watched as their firms declared bankruptcy and terminated their plans altogether. And more may be in trouble, particularly in industries such as auto parts.
Not only that, new regulatory and legislative changes now in the works could encourage companies to freeze their pensions—or get out of the pension business altogether. And questions are being raised about the funding of pensions for public-sector employees.
Add it all up, and it's hard not to conclude that defined benefit pensions are under assault. "The old three-legged stool of retirement security—Social Security, employer-provided pensions and retirement savings—isn't going to exist for many people if these trends continue," says Shaun O'Brien, assistant policy director at the AFL-CIO.
By law, companies may unilaterally freeze pensions for nonunionized employees, provided they give 45 days' notice. "Since there is no requirement that they offer [a pension] in the first place, there's no requirement that they keep doing it," says Jack VanDerhei, a professor at Temple University and research director at the Washington-based Employee Benefit Research Institute.
The changes are primarily cost-cutting. IBM will save $3 billion over the next few years by freezing its pension—savings that will come out of the pockets of employees. Linda Guyer, a 51-year-old software project manager at Armonk, N.Y.-based IBM, has just seen her anticipated pension chopped by about 25 percent. Guyer, a 24-year veteran, says if she works until age 65, she would have received an annual pension of about $37,000. With the plan frozen and benefits ceasing to accrue, "it's going to be about $28,000 a year," she says. "I almost think it's a way to encourage older people to leave the company."
By switching from traditional pensions to defined contribution plans, such as 401(k)s and cash-balance plans—a kind of hybrid of traditional pensions and 401(k)s—companies are clearly passing responsibility for retirement to the worker. The result is what Yale political scientist Jacob Hacker calls "the great risk shift."
Hardest hit are baby boomers and older employees who don't have enough investment years left to build up a sizable portfolio. Even younger workers face problems if they fail to participate in a 401(k) plan or make bad investments.
Furthermore, there's nothing to stop companies from reducing—or ending—their contributions to employees' 401(k)s if times get tough. For example, in December General Motors announced it would end its policy of matching salaried employees' contributions to 401(k) plans on a 20-cents-per-dollar basis, up to 6 percent of salary. (Before April 2005 the company contribution had been 50 cents per dollar.)
Competitive pressures certainly play a role in pushing companies to freeze pensions and offer 401(k)s. But the changing work force, one in which younger employees don't expect to stay with a company for long periods, is also having an impact.
"From an attraction perspective, companies find employees are only interested in 401(k)s," says Cecil Hemingway, a managing principal at the consulting firm Towers Perrin. "So I think as time goes on, we'll see more come to the conclusion that they don't need to offer defined benefits plans."
Legislation now moving through Congress may also have the effect of encouraging companies to freeze defined benefit pensions. Some of the measures are intended to make sure companies adequately fund their pensions. But in general, the legislation could give less protection to workers and more to the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures pensions and pays benefits when companies can't meet their obligations.
In the proposed legislation, companies with underfunded plans would be required to fully fund pensions sooner—within seven years—and pay higher premiums to the PBGC (the Senate bill would give struggling airlines 20 years). Under the House plan, a company would be forbidden from paying out lump sums if the funding for its pension plan fell below 80 percent. And under both bills, if funding fell below certain levels, benefit accruals would cease.
"While I think the legislation well-intended, by putting more pressure and more funding requirements on companies that sponsor plans, they're really encouraging companies to freeze pensions," says Don Fuerst, a partner at Mercer Human Resource Consulting.
New regulatory changes in the arcane world of accounting could have a similar effect. The Financial Accounting Standards Board (FASB), which issues guidelines for publicly held companies, is reviewing a new standard for pension accounting. Under current practice, companies are allowed to "smooth" the investment results from pensions. That means that a bad year (or a good year) in the markets doesn't wind up unduly skewing the company's results. But it also means that companies aren't necessarily reflecting the true market value of their pension assets from year to year. Experts believe the FASB may recommend a new rule that requires companies to record annual pension fund fluctuations in their profit and loss statements. "So if IBM's $50 billion pension plan has a 10 percent loss in a year, a $5 billion loss would flow straight into the company's income report," says Jack VanDerhei.
That sort of volatility doesn't play well on Wall Street, or in the executive suite. Many experts believe that if the liabilities show up on the bottom line, shareholders—and the CEOs beholden to them—may push for companies to drop their plans.
Also facing increasing scrutiny are benefit costs for the public sector—workers for states, cities, schools and other government entities, who tend to enjoy comparatively generous pensions. Governments that are generally strapped and reluctant to raise taxes may be increasingly less willing to support public pensions. Alaska, for example, has replaced its pension with a 401(k) for new state employees and teachers, and similar legislation has been discussed in Colorado. And California Gov. Arnold Schwarzenegger last year embarked upon a high-profile—and unsuccessful—campaign to replace the traditional pensions of California's public employees with a 401(k)-style plan. "With public employees, the day of reckoning is more in the distance," says Boston College's Munnell.
As the great pension shift continues, the worst impact is being felt by workers in their late 40s and 50s, workers like Margo Bryerton, whose long-term plans were made based on expectations of a pension that is no longer a reality. Bryerton chose to work at Nynex—Verizon's predecessor company—because, she says, "I believed that if I did the best I could for them, they would do the best for me."
By Bryerton's account, Verizon has broken a promise, devastating her dreams of retirement security. She has a 401(k), and plans to keep contributing to it, but she won't be able to close the gap between the pension she expected and the pension she'll receive. "I don't have enough time to catch up," she says.
Because of the way such traditional defined benefit pensions are calculated—generally as a percentage of the salary earned during the last several years of service—the freeze will take a big bite out of Bryerton's anticipated pension. The 17-year veteran says that if she retires at 65, she'll have about $300,000 less than she expected. "I have a job I love and make pretty good money," she says. "But I no longer have financial security."
The move to freeze pensions at solid, profitable companies like Verizon—and at others, including IBM, Sprint, Nextel, Tribune Corp., Lexmark, Alcoa and Russell Corp.—is the latest sign of pressure on traditional guaranteed pension plans. "It's an entirely new phenomenon for healthy companies to freeze their pensions," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
In 2003, 41 percent of workers with pension coverage had defined benefit pensions, down from 83 percent in 1980, according to the latest data released in February by the center. For the last several years, employees in struggling industries such as airlines, steel, coal and textiles have watched as their firms declared bankruptcy and terminated their plans altogether. And more may be in trouble, particularly in industries such as auto parts.
Not only that, new regulatory and legislative changes now in the works could encourage companies to freeze their pensions—or get out of the pension business altogether. And questions are being raised about the funding of pensions for public-sector employees.
Add it all up, and it's hard not to conclude that defined benefit pensions are under assault. "The old three-legged stool of retirement security—Social Security, employer-provided pensions and retirement savings—isn't going to exist for many people if these trends continue," says Shaun O'Brien, assistant policy director at the AFL-CIO.
By law, companies may unilaterally freeze pensions for nonunionized employees, provided they give 45 days' notice. "Since there is no requirement that they offer [a pension] in the first place, there's no requirement that they keep doing it," says Jack VanDerhei, a professor at Temple University and research director at the Washington-based Employee Benefit Research Institute.
The changes are primarily cost-cutting. IBM will save $3 billion over the next few years by freezing its pension—savings that will come out of the pockets of employees. Linda Guyer, a 51-year-old software project manager at Armonk, N.Y.-based IBM, has just seen her anticipated pension chopped by about 25 percent. Guyer, a 24-year veteran, says if she works until age 65, she would have received an annual pension of about $37,000. With the plan frozen and benefits ceasing to accrue, "it's going to be about $28,000 a year," she says. "I almost think it's a way to encourage older people to leave the company."
By switching from traditional pensions to defined contribution plans, such as 401(k)s and cash-balance plans—a kind of hybrid of traditional pensions and 401(k)s—companies are clearly passing responsibility for retirement to the worker. The result is what Yale political scientist Jacob Hacker calls "the great risk shift."
Hardest hit are baby boomers and older employees who don't have enough investment years left to build up a sizable portfolio. Even younger workers face problems if they fail to participate in a 401(k) plan or make bad investments.
Furthermore, there's nothing to stop companies from reducing—or ending—their contributions to employees' 401(k)s if times get tough. For example, in December General Motors announced it would end its policy of matching salaried employees' contributions to 401(k) plans on a 20-cents-per-dollar basis, up to 6 percent of salary. (Before April 2005 the company contribution had been 50 cents per dollar.)
Competitive pressures certainly play a role in pushing companies to freeze pensions and offer 401(k)s. But the changing work force, one in which younger employees don't expect to stay with a company for long periods, is also having an impact.
"From an attraction perspective, companies find employees are only interested in 401(k)s," says Cecil Hemingway, a managing principal at the consulting firm Towers Perrin. "So I think as time goes on, we'll see more come to the conclusion that they don't need to offer defined benefits plans."
Legislation now moving through Congress may also have the effect of encouraging companies to freeze defined benefit pensions. Some of the measures are intended to make sure companies adequately fund their pensions. But in general, the legislation could give less protection to workers and more to the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures pensions and pays benefits when companies can't meet their obligations.
In the proposed legislation, companies with underfunded plans would be required to fully fund pensions sooner—within seven years—and pay higher premiums to the PBGC (the Senate bill would give struggling airlines 20 years). Under the House plan, a company would be forbidden from paying out lump sums if the funding for its pension plan fell below 80 percent. And under both bills, if funding fell below certain levels, benefit accruals would cease.
"While I think the legislation well-intended, by putting more pressure and more funding requirements on companies that sponsor plans, they're really encouraging companies to freeze pensions," says Don Fuerst, a partner at Mercer Human Resource Consulting.
New regulatory changes in the arcane world of accounting could have a similar effect. The Financial Accounting Standards Board (FASB), which issues guidelines for publicly held companies, is reviewing a new standard for pension accounting. Under current practice, companies are allowed to "smooth" the investment results from pensions. That means that a bad year (or a good year) in the markets doesn't wind up unduly skewing the company's results. But it also means that companies aren't necessarily reflecting the true market value of their pension assets from year to year. Experts believe the FASB may recommend a new rule that requires companies to record annual pension fund fluctuations in their profit and loss statements. "So if IBM's $50 billion pension plan has a 10 percent loss in a year, a $5 billion loss would flow straight into the company's income report," says Jack VanDerhei.
That sort of volatility doesn't play well on Wall Street, or in the executive suite. Many experts believe that if the liabilities show up on the bottom line, shareholders—and the CEOs beholden to them—may push for companies to drop their plans.
Also facing increasing scrutiny are benefit costs for the public sector—workers for states, cities, schools and other government entities, who tend to enjoy comparatively generous pensions. Governments that are generally strapped and reluctant to raise taxes may be increasingly less willing to support public pensions. Alaska, for example, has replaced its pension with a 401(k) for new state employees and teachers, and similar legislation has been discussed in Colorado. And California Gov. Arnold Schwarzenegger last year embarked upon a high-profile—and unsuccessful—campaign to replace the traditional pensions of California's public employees with a 401(k)-style plan. "With public employees, the day of reckoning is more in the distance," says Boston College's Munnell.
As the great pension shift continues, the worst impact is being felt by workers in their late 40s and 50s, workers like Margo Bryerton, whose long-term plans were made based on expectations of a pension that is no longer a reality. Bryerton chose to work at Nynex—Verizon's predecessor company—because, she says, "I believed that if I did the best I could for them, they would do the best for me."
By Bryerton's account, Verizon has broken a promise, devastating her dreams of retirement security. She has a 401(k), and plans to keep contributing to it, but she won't be able to close the gap between the pension she expected and the pension she'll receive. "I don't have enough time to catch up," she says.
posted by Bludlust at 9:31 AM
0 Comments:
Post a Comment
<< Home