Three of the seven regional Bell operating companies have converted their defined benefit pension plans to cash balance plans.
The companies - faced with changing employment patterns and riding the crest of corporate restructurings - view the plans as better suited for younger and more mobile employees who might not spend their entire working lives with one company.
Bell Atlantic Corp., Philadelphia, last month announced it would convert its $5.8 billion non-union management pension plan to a cash balance plan on Jan. 1. Bell Atlantic is the third Baby Bell to adopt a cash balance or a similar hybrid pension plan. Consultants claim the other four RBOCs have at least discussed similar moves.
BellSouth Corp., Atlanta, was the first RBOC to adopt a cash balance plan in July 1993. Ameritech Corp., Chicago, also replaced its traditional final-average-pay defined benefit plan with a pension equity plan.
Pension officials at the funds and consultants said there was no impact on managers, investment philosophy or asset allocation as a result of the change. They said it is mainly a benefits issue.
A spokesman for NYNEX Corp. said the company has considered a cash balance plan and is "still looking" but does not plan any changes at least until 1997, when its three-year employee downsizing program ends.
NYNEX is in the midst of cutting its staff by nearly 4,000 workers through severance and an early retirement program.
"We have looked at (cash balance) and we are still looking into it," said the NYNEX benefits department spokesman. "But right now we are using our pension plan to meet our needs."
NYNEX might consider a cash balance approach after the downsizing, he said.
Changing demographics, staff reductions and mobile fast-track employees have prompted the telecommunications industry to embrace cash balance plans.
Companies that already have switched mention the employee relations angle as one of the primary reasons. Cash balance plans are defined benefit plans that have some features of a defined contribution plan, such as monthly account statements. Cash balance plans also have more liberal vesting and are portable.
From the employer's standpoint, the cash balance plan eliminates the benefits "cliff" associated with final-average-pay plans where the longer a worker stays, the better the retirement benefit.
Also, cash balance plans usually are front-loaded with more dollars allocated to those with less service and at younger ages and to those who leave early. The more rapid benefit accruals in earlier years are more appealing to younger workers and makes it simpler for companies to cut employees by reducing the incentive for workers to stay until they reach the "cliff" before receiving pension benefits.
Departing employees may take the vested portion of their benefit with them when they leave.
"All these (regional telephone) companies had big cliffs. In the past, when someone retired they became eligible for retiree health and pension benefits and, in many instances, the employee would do anything to hold on those last five years to get the benefits," said Anna Rappaport, managing director at William M. Mercer Inc., Chicago. "The pension plan got in the way of work force management."
"The telecommunications industry is undergoing immense change," said Gary Simko, director of Bell Atlantic benefits planning and human resource communications. "Yet our retirement benefits were designed years ago in a very predictable business climate when many employees spent most of their careers with one company. We needed to meet the needs of mobile employees, who make more frequent moves from employer to employer."
Robert Moreen, managing director at Mercer's Philadelphia office who assisted Bell Atlantic in developing its cash balance plan, said the plan "will reward those employees who remain a long time and not cut short the benefits of those who don't stay as long. Bell Atlantic felt it owed its employees a fair deal. I have never seen a company go into such detail in order to be fair to everyone. It is a good way to solve the 'cliff' problem and it is a good way to move away from the traditional pension plan. Bell Atlantic is now working on a program to coordinate all its retirement benefits - the 401(k) plan, retirement and medical plans - and the cash balance approach simplifies that approach," said Mr. Moreen.
In addition, he said Bell Atlantic will begin producing combined account statements next year for the cash balance and 401(k) plans.
R. Thomas Hepburn, staff manager at BellSouth, said the cash balance plan has been well received after a rocky start. He said when the program was first announced in 1993 the company was in the midst of downsizing and making major personnel changes.
Mr. Hepburn said the portability feature has made it easier administratively for BellSouth to move workers among its many operating units. Additionally, he said, the plan has resulted in somewhat lower costs to BellSouth, although the plan was designed to be "cost neutral."
Mr. Hepburn said there are several reasons cash balance plans may be attractive to telecommunications companies.
"One of the hardest things we're faced with is convincing employees we lay out a lot of dollars on their behalf. To them a defined benefit plan is sort of meaningless. But when you show them the contributions ..with cash balance it is easier to communicate and easier for them to understand. People have become accustomed to their account statements. We now provide them with diskettes where they can plug in their own assumptions. We believe it has worked well for us," he said.
Norm Clausen, partner at Kwasha Lipton, Fort Lee, N.J., where the cash balance plan was developed, said the plans encourage "performance-based employment" and "break people out of the mentality they have to stay with a company until they retire."