Just as companies thought their pension plans might be climbing out of the red, they are about to get hit with a double whammy of higher fees and ballooning obligations.
Not only do employers face a 52% increase by 2016 in the regulatory cost of administering their pension plans, but also a $150 billion surge in liabilities from longer-living retirees.
The looming costs and growing liabilities are forcing many companies to consider ways to cut pension expenses, accelerating a decadeslong shift away from defined-benefit pensions plans—which guarantee a set payout for life—to plans that shift the burden of retirement savings to workers.
As employers back away from lifetime commitments to their retirees, some labor negotiations are getting tense.
“It’s a big deal,” said Caitlin Long, head of the corporate strategies group at Morgan Stanley. “It’s definitely causing companies to rethink the benefits of holding a pension.”
Ms. Long estimated that the higher fees could add $20 billion in costs to companies’ $2 trillion in pension obligations over the life of the pension plans.
Increasingly, companies are closing their pension plans to new hires, offering lump-sum payments to shrink their outstanding obligations or handing over management of their pension assets to insurers.
The ramifications are significant. More than 60 million American workers and retirees are covered by defined-benefit plans, according to the American Institute for Economic Research, though their numbers have been shrinking rapidly in recent years.
In 1979, 38% of U.S. private-sector workers were covered by such plans; by 2011, the most recent data available, the number had fallen to 14%, says the Employment Benefit Research Institute. By contrast, the percentage enrolled in defined-contribution plans, such as a 401(k), more than doubled to 42%. That means more employees are responsible for saving for their future.
“There’s a great deal of concern,” said Shaun O’Brien, assistant policy director for health and retirement at the AFL-CIO, who expects more employers to bargain for lower pension costs in contract talks.
Congress intensified the financial pressures in December by raising the fees companies must pay the Pension Benefit Guaranty Corp. Fees to the federal pension insurer for each employee covered will rise to $64 by 2016, up from $42 last year.
The Society of Actuaries recently updated its mortality tables for the first time since 2000 to reflect the longer life spans of today’s retirees. Based on the update, the average man who turns 65 this year is expected to live to 86.6, up from 82.6 in 2000. Women are expected to live to 88.8, up from 85.2. That means companies will have to sock away more money to pay benefits years longer.
The new tables will be finalized later this year and become the standard auditors use to gauge corporate pension obligations. Mercer LLC estimates that corporate pension liabilities totaled about $2 trillion at the end of 2013. The increased life expectancy will add about 7% to the pension obligations on balance sheets, according to consulting firm Aon Hewitt.
“It’s another reason to say, ‘Why do people have these plans?’ ” said Wayne DeVeydt, chief financial officer of WellPoint Inc. The health insurer has closed its defined-benefits plan to new employees, but the plan still covers roughly 3,000 workers.
Railroad company CSX Corp. is considering offering its employees the option of taking single, lump-sum payouts instead of regular periodic disbursements when they retire. “The increase in fees impacts the cost of providing the plan,” said Fredrik Eliasson, the company’s CFO. He stressed the plan remains a valuable employee perk and CSX will continue to offer it.
Mr. Eliasson wouldn’t say how much higher overall CSX’s fees will be, but the costs add up. Xerox Corp. , which closed its plan to new participants in 2005 and froze the plan in 2012, will pay about $9 million more in fees this year.
To reduce cost and risk, some companies have transferred employees to 401(k) retirement savings plans. Boeing Co. said this month that it would freeze pension benefits of more than 68,000 nonunion employees and switch them to a 401(k).
Other companies are transferring pension liabilities—and the risk—to specialists. In 2012, General Motors Co. and Verizon Communications Inc. shifted roughly $27 billion and $7.5 billion, respectively, to Prudential Financial Inc.
The insurer took responsibility for paying the companies’ obligations to retirees. GM and Verizon, on the other side of those deals, wiped the liabilities off their books.
Verizon’s nonunion pensioners have fought back because they don’t have the same federal payment protections if Prudential goes under. A lawsuit on behalf of 41,000 Verizon retirees filed in the U.S. District Court for the Northern District of Dallas alleges that the company took “advantage of the group of retirees least able to defend themselves.”
“I really do feel jilted,” said Willy Goedeke, a former administrative employee who retired in 1994 after 28 years of service. “It was sort of sprung on us.”
A federal judge ruled in favor of Verizon last June, but the retirees refiled their complaint and have again asked the judge to void the Prudential deal.
Verizon argues that Prudential is one of the most reputable insurance companies in the U.S. But it is clear that Verizon, like an increasing number of U.S. companies, doesn’t want the cost or risk of guaranteeing retirement benefits for its employees.
The Prudential deal “put the retirement plan in the hands of someone where this is the core of what they do,” said Raymond McConville, a Verizon spokesman. “Our business is not monitoring rates and managing pension funds.”
Source: The Wall Street Journal (Subscription required)