Pension funds of telecommunications companies facing new, and deeper, job cuts likely will be able to meet benefit obligations without wholesale asset liquidations.
Executives at some of the affected companies said the long-term nature of the job reductions and the fact many companies won't offer lump-sum payouts would allow them to retain normal asset allocation patterns as they cash out thousands of retirees, although some liquidations could become necessary in the future.
Still, they face more immediate, huge administration and accounting burdens.
"Now, in a relatively short time, you could have a larger number of benefit calculations, sometimes involving a modification of benefit formula such as extra benefits or increasing years of service and lump sums, and sometimes you may not be equipped to do that," said Alan Glickstein, partner and actuary at Kwasha Lipton, Fort Lee, N.J.
And, longer term, pension plan liabilities could be affected if there are substantial immediate lump-sum payouts that could result in a "downgrade of the funded status of the plan," Mr. Glickstein said. The ultimate result: increased contributions by the plan sponsor.
Straining to deal with the twin pressures of increased competition and rapid technological change, telecommunications companies have announced recent job cuts totaling at least 85,000.
Among the deepest cuts, American Telephone & Telegraph Co., Berkeley Heights, N.J., announced this month it will eliminate 14,000 to 15,000 jobs in the next two years while NYNEX Corp., New York, said it will cut 22% of its work force, or 16,800 employees, by the end of 1996. GTE Corp., Stamford, Conn., plans to cut 17,000 jobs in the next three years, and Pacific Telesis Group, San Francisco, will cut 10,000 jobs by the end of 1997. U S WEST Inc., Denver, announced late last year a reduction of 9,000 employees, BellSouth Corp, Atlanta, 8,000 jobs, and Southwestern Bell Corp., San Antonio, 1,500.
How hard the pension funds are hit depends, in large part, on whether participants are offered lump-sum payouts. Lump sums can drain a fund's cash reserves, and can require liquidation of invested assets. Of the companies recently announcing layoffs, four said they would not, or probably would not, offer lump sums: Southwestern Bell, NYNEX, U S WEST, and AT&T. BellSouth and PacTel are planning on offering lump sums, while GTE will offer them for management employees, but union contracts will dictate what union employees will receive.
Said a spokesman for NYNEX: "I've been led to believe that lump sums will not be part of the package."
R. W. Wohlert, managing director-finance and assistant treasurer at Southwestern Bell, doesn't anticipate plan modifications with the latest round of job cuts because there probably will be no lump-sum provisions. "If a person is eligible and vested, they will retire at the normal time," he said.
Southwestern Bell went through a round of job cuts in 1991 that involved liquidation of $900 million in pension fund assets to pay enhanced benefits and lump-sum payouts, according to Mr. Wohlert.
He said the fund, which now has $7.6 billion, sold off a portion of its indexed equity assets. "For us, it was easier than it may have been for others because of our high position in index funds. (At the time, the fund had about half of its equity portfolio, or about $2 billion, in indexed strategies.)It was not disruptive to our overall asset allocation. Index funds are fairly liquid, and we were overloaded with equities at the time," he said.
Richard P. McGahan, executive director-investment management at Pacific Telesis Group, San Francisco, said the job cuts would create "nothing out of the ordinary" for the $11.2 billion pension plan. He said the departures would not result in any alterations in pension management immediately because the cuts represent a "relatively small" percentage of the total work force, and will extend through 1997.
But, eventually, he said, "we will have to sell some securities, but nothing which would cause us to make any significant changes in asset allocation."
A U S WEST spokesman said there should be little, if any, impact on the pension fund operation because of the cuts. "It would be different if it were a one-time payment, then there could be a scramble for liquidity. But we will still have liquidity and we will still have to make benefit payments to eligible retirees," he said, noting the company probably will not be doing lump-sum payouts.
That was not the case in 1991, when U S WEST had to liquidate $300 million in stock because more employees than expected took advantage of an early retirement program. Two-thirds of the 6,000 eligible employees elected early retirement then and 3,000 took lump-sum distributions, causing the pension assets to drop by $650 million. As a result of that stock sale, the allocation of the fund was altered, raising the amount of illiquid assets in the portfolio by 30% (Pensions & Investments, Dec. 23, 1991).
A spokesman for BellSouth said no changes in asset allocation are planned and no asset liquidations are expected. He said officials "have looked carefully at any potential impact of the work force reductions on the pension plan and ... don't anticipate any need to make changes in the liquidity requirements. All this has been anticipated and planned for."
Larry Wiltse, consulting actuary at Buck Consultants, New York, reiterated that pension plans of affected telecommunications companies should weather the downsizing relatively unscathed barring any immediate large-scale runs on the plans because of heavy lump-sum payouts.
"The first thing they will look at is, does the plan have lump-sum payouts. If so, and if there is a large-scale downsizing among older employees, there could be a significant impact on cash flow.
"But from the looks of it, it doesn't look like it is just older people affected, but across the board. Investment-wise there really isn't much for them to do unless there is a significant immediate lump-sum payoff," Mr. Wiltse said.
Spreading the payouts over several years lessens the impact on the pension fund operation, he said.
"If it is spread over the next several years it is less of a problem so you don't have to raise cash all at one time and it resembles a more normal cash flow," Mr. Wiltse said.
