More Large Firms Freeze, End Pensions

Big employers sharply accelerated freezes and terminations of pension plans last year, steering away from the increasing expense and uncertainty of paying for workers’ retirement, a new study says.

About 11% of the big companies offering traditional pensions terminated their plans or froze accrual of new benefits to workers, according to a study by consulting firm Watson Wyatt Worldwide, released Wednesday. That is up from 2003, when 7% of those companies capped pension plans.

That trend, long in the making, has continued into this year, most notably with UAL Corp.’s United Airlines defaulting on its severely underfunded pension plans. Whether it continues could hinge on how lawmakers resolve a number of difficult questions swirling around pensions, experts say.

About half of the companies that froze pension accruals or terminated plans last year are financially troubled businesses, the study found.

But even many healthy companies are rethinking pensions, partly because of the uncertain legal status of some pension plans. Many companies that for years were able to get by making minimal contributions to their pension plans are now faced with massive increases in required payments. In addition, Congress is debating whether to jack up the premiums companies pay the federal government to insure their pension plans.

That could lead even more companies to abandon pensions.

“The companies are operating in a world of uncertainty,” said Sylvester Schieber, director of U.S. benefits consulting at Watson Wyatt. “Big companies that continue to be viable, for the most part, have not cut and run, although if we go on indefinitely with this uncertainty they undoubtedly will.”

Nearly two-thirds of the 1,000 largest U.S. companies still sponsor a pension plan. But last year 71 of those companies froze or terminated plans, up from 45 in 2003.

In a freeze, an employer leaves a plan in place, but current workers cannot accrue any additional benefits. In a termination, a company closes down a plan, defaulting to the federal government or moving pension funds into an insurance policy that will eventually pay workers.

Many pension plans were squeezed in the early part of this decade by plummeting stock prices that cut sharply into investment returns. At the same time, record-low interest rates, which companies use to determine how much they need to set aside to satisfy eventual pension payouts, drove up the amount needed to satisfy those future costs.

The stock market has recovered considerably. But pension plans remain under pressure, partly because administrators spread the cost of the market downturn out over five years, experts said.

At the same time, many companies are faced with paying substantial amounts into pension plans after years of minimal costs. During the 1980s and 1990s, investment returns and laws limiting contributions meant many companies could put off funding the future retirement of their workers.

“I think [chief executives and chief financial officers] started to suddenly realize there’s actually a dollar value to these promises we’ve been making,” said Jack VanDerhei, a professor at Temple University and a fellow at the nonpartisan Employee Benefits Research Institute. “They’re getting to a point where, if we [companies] want to go forward, it’s going to cost us money.”

Companies are also doubtful about Congress’ slowness to clear up uncertainty over a type of pension known as cash balance plans, which have been criticized as unfairly discriminating against older workers.

Lawmakers also are debating changes in pension funding rules and premiums companies pay to the financially strapped Pension Benefit Guaranty Corp., the government agency that insures pensions.

In addition to United Airlines, the pension agency this year has taken over pensions covering US Airways Group Inc. flight attendants and machinists.

Companies including Sears Holding Co., NCR Corp. and Circuit City Stores Inc. have frozen pension plans for all or some of their employees in the last year.