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- an antiquated idea about providing for workers after they retire, even long past the time the market has decided they are worth anything
The swift demise of traditional plans catches some analysts by surprise. 'This is a watershed event,' one expert says.
By Peter G. Gosselin, Times Staff Writer, firstname.lastname@example.org
From the Los Angeles Times, July 11, 2007, Copyright 2006 Los Angeles Times
WASHINGTON — Nearly two-thirds of employers that offer traditional pensions have closed their plans to new hires or frozen them for all employees, or plan to do so in the next two years, according to a study released Tuesday.
The latest numbers show an acceleration in the decline of pensions — retirement plans in which employers, instead of employees, are responsible for investing retirement money and providing benefits. They also illustrate that the trend is no longer confined to troubled industries such as steel, auto and airlines, but now involves healthy companies such as IBM and Verizon.
Analysts have known for some time that the number of employers shutting or freezing their pension plans was on the rise. But the sharpness of the increase caught some by surprise.
"This is a watershed event," said Jack VanDerhei, a Temple University pension specialist. "There has been a steady decline in traditional pensions for two decades, but the trend is really accelerating, and it's going to accelerate even more."
The survey by the industry-supported Employee Benefit Research Institute and Mercer Human Resources Consulting shows that most companies that close off their pensions seek to partially offset the loss to employees by increasing contributions to firm-sponsored 401(k)s, where employees are responsible for managing their own retirement money.
But critics say the increases do not make up for the demise of pensions.
The offsetting benefits of 401(k)s "are not measuring up," said David M. Certner, legislative policy director for AARP, the giant services and lobbying organization for senior citizens. "There are a lot more ways people can get tripped up with 401(k)s than with traditional pensions."
The pickup in the pace of pension closures and freezes is particularly surprising because employers seemed to have weathered the worst of their financial problems several years ago.
During the booming 1990s, a rising stock market raised the value of plans' investments so much that collectively the plans had to contribute only about $30 billion a year to ensure they could meet their obligations to future retirees.
But in 2000, two things happened: The stock market crashed, slashing the value of investments, and interest rates sank. Declining interest rates reduced the return on their investments, forcing the plans to set aside more funds to meet future benefit obligations.
The combination raised the amount that plans collectively had to set aside to about $90 billion a year, and dramatically increased the number of plans that were considered "underfunded" and unable to meet their future obligations.
But the number of underfunded plans has come down in the last four years and, by some measures, the pension system as a whole is back in financial balance, analysts say.
Paradoxically, one of the key items that has pushed employers into the new rush to get out from under their pension burdens is a law approved by Congress last year that was designed to stabilize the pension system.
Employers quizzed by EBRI and Mercer cited the law, the Pension Protection Act, in explaining their actions.
Nearly 30% of those who said they planned to freeze or close their plans in the next two years cited uncertainty about the law as contributing to their decisions. More than half said their belief that the law would raise costs was key to their decision.
"Companies hate uncertainty, and this law has created a lot of uncertainty," said Mauricio Soto, a research economist with Boston College's Center for Retirement Research.
The new survey found that 25% of employers questioned had closed their pensions to new hires within the last two years, whereas 12.9% had frozen their plans for all employees. The survey found that more than 30% of employers expected to make similar changes in the coming two years. The survey questioned 162 employers, including some of the nation's largest companies, according to the study's statistics.
The acceleration of pension freezes and closures raises anew the question of whether the 77-million-strong baby boom generation is financially ready to retire.
Some recent studies have suggested that baby boomers are not as ill-prepared as previously suggested, and that a combination of pensions, 401(k)s and home equity, together with Social Security, would see them through old age.
But EBRI analysts suggested those studies might need to take a fresh look in light of the new survey's results.
"It appears that any careful analysis of retirement income adequacy … must be modified substantially to factor in the extraordinary plan changes among [pension] sponsors in the last few years," analysts said.
"What you're seeing is the slippage of the middle class," said Certner of AARP. "Their retirement benefits are much smaller than those of the previous generation that had traditional pensions."
Pensions may be outsourced, By Jonathan Peterson, October 31, 2007, Copyright 2006 Los Angeles Times
Banks look to take the plans and their assets off the hands of employers.
WASHINGTON — Would you feel comfortable if your company sold off your pension plan to a big bank?
This month, Citigroup Inc. got the green light from the Federal Reserve for an unusual deal to take over the $400-million retirement plan of a British newspaper company.
In exchange for getting its hands on all that cash, Citigroup will run the pension plan -- investing the money, paying the benefits and taking on the liability previously borne by Thomson Regional Newspapers. And it's eyeing similar moves stateside.
Other banking investment and financial companies, including JPMorgan Chase & Co., also are exploring the idea of taking pension plans -- and their billions of dollars of assets -- off the hands of employers. At least three federal agencies are considering aspects of the idea, including its basic legality and safeguards for workers.
Advocates say such changes would be a win-win for retirees and employers, retaining all the protections of current law, while putting plans in the hands of sophisticated financial stewards. Plus, large banks are less likely to go out of business or face severe financial strains than smaller employers.
Yet other people worry that such setups could subject retirement benefits to new risks and jeopardize decades-old worker protections. They're concerned that the would-be pension managers are more interested in profit than in the security of retirees. Further, they fear that unwise investments could bring a crisis for which there is no simple solution.
"This is easy money," said Karen Friedman, policy director of the Pension Rights Center, an advocacy group that speaks out on pension policies and retirement security issues from the standpoint of workers and retirees. "You'd have these third-party institutions that would have really no ties to the workforce. . . . We have a lot of concerns. There are some big questions."
Targeting 'frozen' plansEdit
The main targets for pension takeovers are the growing number of plans that have been limited or "frozen" by employers, as the Thomson plan was. From 2002 to 2006 alone, some 3 million workers may have had their plans limited or frozen, according to the Center for Retirement Research at Boston College.
Pension freezes typically mean that new employees can't participate in a plan or that current workers can't increase their benefits.
Pensions are protected by the Employee Retirement Income Security Act of 1974 and amendments to that law, which set standards for funding a company's long-term promises. The law also places responsibility on those who run plans to act entirely in the interest of workers and retirees. Investments are supposed to be diverse and chosen wisely.
These traditional pensions still cover about 44 million workers and retirees, and represent a cash pot of $2.3 trillion.
But a growing number of employers have been backing away from such plans, which have guaranteed benefits; instead, many are offering 401(k) plans and other programs without fixed benefit payouts.
Two-thirds of companies that offer traditional pensions either have limited the benefits or plan to do so in the next two years, according to a July survey by the Employee Benefit Research Institute and Mercer Human Resource Consulting.
Even when pensions are frozen, however, employers face costs and uncertainties about their pension investments and how long people will live to collect benefits.
In addition, new accounting rules require companies to make clear their pension liabilities on their balance sheets -- which adds another source of volatility to financial statements. And some firms are worried about a 2006 law that may push up compliance costs.
Looking for alternativesEdit
Ari Jacobs, head of the Retirement Benefits Advisory Group at Citigroup in New York, said American employers seemed "very interested in opportunities to reduce or eliminate the risks associated with their pension plans." He added: "We in the U.S. are looking at a similar model" as the British deal.
"A lot of these companies -- including some that are our clients -- are asking, 'What are our alternatives now that we've frozen the pension plan?' " said Scott Macey, senior vice president and director of government affairs for Aon Consulting.
Until now, the alternatives have been to pay off workers with cash or to buy annuities from insurance companies, which then continue to pay the benefits.
But now, financial companies such as Citigroup say they could do the job more cheaply than insurance companies -- and with greater expertise at managing risk. Insurance companies, for example, face costly state-by-state regulation that pushes up the price of annuities.
"As a financial institution, we believe we're better at managing financial risk than anybody else," Citigroup's Jacobs said. "That's our core business."
Carl Hess, head of Watson Wyatt Worldwide's investment consulting practice, said: "The banks are saying, 'We can undercut the insurance companies.' That's what they see as their entree here."
Chicago-based Aon is in talks with "several large financial institutions" to explore ways that those firms could assume control of pension plans, Macey said. As envisioned, all legal protections for workers and retirees under the 1974 retirement income law would remain in effect.
"Everything that a current plan sponsor would be required to do, the new sponsor would be required to do," he said.
Jacobs echoed that, saying: "This is not about changing anybody's benefits whatsoever."
Asked why a financial firm would be interested in taking on pension obligations, Bradley D. Belt, former executive director of the federal Pension Benefit Guaranty Corp., which insures private pension benefits up to certain limits, put it this way: "If somebody gave you $95 today and said, 'you get to pay me $100 a year from now,' would you take the money? I suspect that most people who are in the asset management and investment management business would say absolutely yes."
Belt, now chairman of advisory and investment firm Palisades Capital Advisors, is among those interested in taking over pension plans.
He is talking with large partners about pursuing such business if it becomes legal.
Retirees whose plans were transferred "would still have the full panoply" of government protections, Belt said.
But Norman Stein, a pension authority and professor at the University of Alabama School of Law, worries that if shifting ownership becomes an easy option, it might encourage some employers to freeze and unload pension plans instead of sticking by them.
If federal regulators eventually allow such ownership shifts, Stein would like to see ironclad assurances that benefits would not be jeopardized.
U.S. regulators are starting to weigh in. The Department of Labor is examining whether such proposals are legal under the Employee Retirement Income Security Act, and the Internal Revenue Service is reviewing such matters as whether new pension sponsors would be able to deduct any pension contributions they make, as employers are allowed to do.
The Pension Benefit Guaranty Corp. is also looking into the matter. The federal pension insurer's deficit -- already $18 billion -- will grow if major plans go belly up in the future and it is forced to take on new obligations. At the same time, better management of shaky pension funds could save the insurer from new costs.
"These proposals present the possibility of significantly greater security for pension beneficiaries and the PBGC," said Charles E.F. Millard, its interim director. "This could be very attractive, but there are numerous regulatory issues and potential risks that need to be explored."
Managing the risksEdit
Among the risks to be considered: What would happen if a financial company took control of many pensions, perhaps bundling them together -- and the investments failed? The federal pension insurer could then be faced with an overwhelming cost, Watson Wyatt's Hess said.
If an outside company took over just a few pension plans, the risks might be manageable, he said. "It works twice," he said. "It doesn't work 200 times."
Aaron Albright, spokesman for the House Committee on Education and Labor, said the panel was examining what implications such pension takeovers would have for workers.
"We also want to make sure that these buyouts do not create new incentives for companies to drop their defined benefit plans," he said.