U.S. District Court Decision Spotlights Pension Problems

Article excerpt

These are financially perilous and confusing times in the world of corporate pensions, which hold the promise of retirement income for an estimated 50 million workers in the United States. With members of the leading edge of the boomer generation in their late 50s and heading toward retirement, the solvency of pensions will be a powerful economic, legal and political issue. A July federal district court decision involving older workers at IBM spotlighted the complications looming over this issue.

Each of the two major categories of pensions has a serious set of problems. First, traditional defined-benefit plans, which provide a predictable amount based on a worker's salary and years of service, were the heart of the pensions adopted by large corporations after World War II, when unions made pensions a key demand at the bargaining table. For big unions in the automobile, steel and other heavy industries, the slogan was "30 and out," a generous pension after three decades of hard, sweaty work. The key to these pensions is that the risk is borne by the employer while the worker has a guarantee.

SHIFTING RISK

Second are defined-contribution plans in which a company provides a contribution for each worker, typically a percentage of an employee's annual salary. The amount a worker gets in pension benefits depends on the size of the account when he or she retires. If the investments have done well-and the stock market has prospered-the account will be a good-sized one. If investments performed poorly, as have many 40I(k) accounts in recent years, the account will be disappointing. The risk is on the worker, not the employer.

One type of defined-contribution account is the increasingly popular cash-balance plan. These accounts are not invested by individual workers, as they are in 40I(k)s, but are actually pooled and managed by the company. A big advantage of cash-balance pensions is that workers don't have to wait decades for retirement to get their hands on the money. They can take the money with them when they move to another job, and may roll it into an Individual Retirement Account, or invest it in the new employer's pension plan. This option appeals to younger workers who are more likely to move among different jobs throughout their careers.

HUNDREDS OF CORPORATIONS

Hundreds of corporations have switched from defined-benefit to cash-balance plans, and the transition has become controversial. Sometimes, when companies make the switch, older workers can suffer a financial penalty.

The problem with the defined-benefit plans is described in one word: under-funded. Companies are obligated to fund them to meet future pension responsibilities, a task that was easy when financial markets were booming and a small contribution was swelled by the rapid run-up in stock prices. But the market crashed, eroding the value of the pensions and turning big surpluses into huge deficits. Each year Towers Perrin, a major benefits consulting firm, surveys 300 major companies with defined-benefit plans. In 1999, these corporations could meet 120% of their pension obligations. By 2002, plan assets covered only 77% of future commitments. These plans have to make up the difference, even if it means moving substantial shares of company revenues and profits into pension investments rather than into new investments in factories and equipment that could increase productivity or generate jobs.

Big industrial companies with aging workforces and growing numbers of retirees see bolstering their pension plan as a major economic burden. The General Motors pension plan, for example, is underfunded at an estimated $25 billion. The company sold $13 billion in bonds in June to raise money for the fund. The average company in the Towers Perrin survey pumped $164 million into its pension plan in 2002, a huge increase from the $64 million contributed in 2001. …