Saturday, March 25, 2006

Pension freezes force workers to seek alternatives

Pension freezes force workers to seek alternatives
By Brian Tumulty, Gannett News Service

WASHINGTON — Peter Donahue planned to stay in his job at Verizon until he retired at age 62.

But that changed for the 54-year-old network design engineer after Verizon announced it was freezing its pension plan for 50,000 management and other salaried non-union employees at the end of June.

Donahue now plans to quit Verizon later this year, take his pension as a $500,000 lump sum and invest it in an IRA, and get another job — at a much lower salary — for a Verizon subcontractor.

Of the 44 million Americans covered by pension plans, Donahue and hundreds of thousands of workers like him are finding they need to come up with a "Plan B" for retirement.

Freezes vary by employer

A summary of how some pension freezes have played out:

Alcoa: As of March 1, 2006, all new non-union employees are eligible for only a 401(k) retirement savings plan with a more generous company contribution. Retirees and workers hired before March 1 are not affected. Most of Alcoa's 60,000 U.S. employees are unionized members of the United Steelworkers.

General Motors: About 42,000 salaried workers affected. Starting Jan. 1, 2007, pensions will be frozen for salaried employees hired since Jan. 1, 2001. Instead, the company will contribute an amount equivalent to 4% of their salary into a 401(k) savings plan. Salaried employees hired before Jan. 1, 2001, will have their traditional pensions frozen and will earn additional benefits under a less generous hybrid pension plan. Hourly workers represented by the United Auto Workers union are not affected.

IBM: After Dec. 31, 2007, pensions will be frozen for about 117,000 U.S. employees. About 7,500 people hired since Jan. 1, 2005, have not had a pension and instead had a 401(k) retirement savings plan that provides a 6% dollar-for-dollar match to participants. Beginning in 2008, these recent hires, as well as employees who had a cash balance pension plan, also will get a 2% automatic contribution to the 401(k). Longer tenured employees who were in the company's pension equity plan will get an automatic 4% company contribution to their 401(k) plus the 6% company match.

Northwest Airlines: Since August 2005, salaried and management employees — about 10% of the airline's 32,000 employees — have had their pensions frozen. In its place, they have received a 401(k) plan. The airline also has been negotiating with its seven unions on a plan to freeze their pensions. Most of the unions have ratified or tentatively agreed to the change as part of a larger effort to avoid terminating the pension plans and having them put under the control of the federal Pension Benefit Guaranty Corporation.

Sprint Nextel: Effective Dec. 31, 2005, pensions were frozen for 39,000 of the company's 80,000 employees. The company match for their 401(k) retirement savings plan was increased from 3% to 5%. Another 25,000 people employed in Sprint's local telephone division that will be spun off as a separate business known as Embarq have pensions that are not affected by the freeze. Former Nextel employees who joined Sprint in last August's merger did not have a pension plan.

Unisys: All but a few hundred unionized employees out of a U.S. workforce of 17,400 will have their pensions frozen after Dec. 31. The company will enhance its dollar-for-dollar matching contribution to the 401(k) retirement savings plan from 2% to 6% for employees who choose to participate.

Verizon: Effective June 30, 2006, pensions will be frozen for 50,000 management and salaried employees. The maximum company match for the 401(k) retirement savings plan will increase from 5% to 9% for those employees. Former employees of MCI who became part of Verizon Jan. 6 did not have a pension plan. Pensions for about 100,000 unionized workers, most of them represented by the Communications Workers of America, are not affected.

-- Brian Tumulty, Gannett News Service

Besides Verizon, well-known employers such as General Motors, IBM, Sears, Alcoa, Northwest Airlines, Sprint Nextel and Unisys have announced pension plan freezes, many of them just in the last few months.

Unlike pension plan terminations of the past, when companies such as Bethlehem Steel and United Airlines were in bankruptcy and struggling for survival, many of the recent freezes are occurring at profitable companies looking to save money and be more competitive.

"Every corporate office in America has it on the table," said Lynn Dudley, vice president for retirement policy at the American Benefits Council. "They have to. One reason is globalization. Europe has gone to this."

Dudley, whose trade group represents large employers with pension plans, thinks Congress could slow the trend with legislation giving employers incentives to keep their plans.

But the major pension legislation likely to emerge from Congress this spring doesn't include those incentives.

Instead, the major goal of the legislation that could be signed into law by Memorial Day is to shore up the finances of the federal Pension Benefit Guaranty Corporation that insures private pension plans.

A booming stock market and high interest rates helped turn pension plans into profit centers in the 1980s and 1990s, but the swing in the stock market and lower interest rates have now made these retirement benefits a burden for many corporations.

"Now they recognize this is not a free lunch," said PBGC Executive Director Bradley Belt, who plans to leave his job at the end of May. "They are trying to control their costs by freezing their pension plans."

Through the end of 2003, about 2,900 of the nation's 31,000 private sector pension plans had frozen their benefits, according to a study the PBGC released in December. Industries where the freezes were most common: fabricated metals, apparel, textiles, rubber, plastics, primary metals and retail trade.

A few — like Alcoa — have targeted only new hires, leaving the pensions of current employees untouched. Some, such as General Motors and Verizon, have large unionized workforces that are unaffected by the freeze. Others, such as IBM and Sears, are freezing the pensions of all employees.

When a pension is frozen, it essentially stops growing. And workers need to make up the difference out of their own pockets.

How much they need to make up depends on their age and the type of pension plan they had.

Younger workers don't need to save as large a percentage of their wages as those in their 50s.

For older workers such as Donahue, of Lacey Township, N.J., the loss of future benefits is significant.

"I understand the situation the companies are facing," said Donahue, acknowledging that many of Verizon's telecommunications competitors don't have pension plans. "But my problem is that a promise is a promise. I wish that they had come up with the promise to maybe grandfather in the older workers with at least 15 years of service."

If the frozen plan offered a pension based on the final average pay of a worker, the average worker in that situation would need to start saving about 8% more of his income than he does now to make up for the loss, according to a recent study by the Employee Benefit Research Institute.

The extra savings needed for a worker in other types of pension plans is less but still significant, according to the study.

Although many employers have softened the impact of a pension freeze by instituting a 401(k) retirement savings plan, or enhancing the employer contribution to an existing 401(k), it doesn't guarantee retirement security. Additionally, most workers can't take advantage of the 401(k) funds unless they also contribute part of their wages.

That's a dramatic difference from a traditional pension plan, which is ordinarily financed entirely by the employer.

Freezing a pension plan provides an employer with a double advantage — shifting the investment risk from an employer-managed pension fund to an employee-managed account and less cost.

Unisys said it expects to save $700 million over 10 years by freezing its pension plan after the end of this year.

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