My now that IBM has frozen their Defined beenfit plan- it turns out defined benefit plans were economically perverse- for whom- the worker...ummm not my guess, for the corporation- ah I see the corporation paying retired workers is perverse..Kinda the what have you done for me lately corporate tune?

Date:   1/16/2006 8:17:15 PM ( 18 y ago)

TWO PENSION CRISES PLUS HEALTH CARE - The U.S. pension system is heading toward a double crisis. For employees, the crisis is a lack of funding. S&P says the companies in their S&P 500 with traditional pension plans will need another $40 billion to get their plans back up to speed. The second impending crisis is an accounting change that may make pension issues more painful for corporations. Regulations for both pensions and retiree health care cost changes will be implemented over the next five years. Health coverage for retirees is even scarier for employees. The same S&P 500 companies would need to come up with $292 billion to meet current obligations and those "obligations" are only promises...not legal obligations like pension plans.

PENSION PLAN PRESS – With IBM freezing its pension plan, a plethora of articles on the dim future of the defined benefit pension plan concept have hit the press. Here is a summation of what you need to know.

Brief history - The corporate pension has been around since the 19th century, but really came into its own in the U.S. in the years just after World War II. The defined benefit plans assumed lifetime jobs with a company, which seemed reasonable at the time, but has long since ceased being the American norm.

Why is it happening? - Companies are trying to become more competitive and adapt to changing times. They must compete with younger companies that never made pension promises or foreign companies where the government provides retirement benefits or there are no benefits at all. IBM is paying about $270 million to make the change but will save $2.5 billion over the next 5 years.

Why now? – Pension crises at steelmakers and airlines have brought the issue to a head, but arcane accounting rules and low, long-term interest rates mean the accounting benefit for freezing a pension is higher than it would be if long-term rates rise.

Who's most vulnerable? - Salaried employees since companies have to negotiate to cut benefits for workers covered by collective bargaining.

What about earned benefits? - Companies can't cut pension benefits already earned, but the earned benefits in a defined plan may be a lot less than expected.

Who gets hurt the most? - Workers in their 40s and 50s who have been at the company many years. Benefits build up fastest in an employee's final years at a company...50% of a person's pension may be earned in the last five years on the job. Even with bigger 401(k) contributions, these workers may never catch up.

Who isn't hurt? - Current retirees, younger workers and those who switch jobs frequently.

Freezing versus terminating – Freezing locks the pension in place where it currently stands actuarially and the company is obligated to pay in the future. When employers terminate a pension, they must pay out all of the benefits immediately, either in lump sums or by buying each worker an annuity. Most terminations are due to bankruptcy.

Companies at risk – Those with a large percentage of older, longtime employees; those with employees not covered by a collective-bargaining agreement; those have already cut some retiree benefits in the past.

GOOD RIDDANCE TO DEFINED BENEFITS – Fortune sees the IBM pension plan freeze as the beginning of the end of traditional pensions in the U. S. and editorializes that "corporate pensions are an unstable, unfair and economically perverse means of paying for retirement."


 

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