BETHESDA, Md. -- The average company realizes some pension cost saving by shifting to a cash balance or other hybrid plan from a traditional defined benefit plan, according to a new study by Watson Wyatt & Co.
For employees, conversion in general causes a significant redistribution of benefits, with younger workers tending to fare better than older, longer-tenured workers.
By a number of measures, companies that switch to a cash balance or another similar plan from a traditional defined benefit plan tend to be better off financially after the change, the study found.
In terms of pension costs, the study found, a typical company saves 1.4% from hybrid plan conversions, after factoring in simultaneous 401(k) enhancements employers often make.
Sylvester J. Schieber, vice president-research at Watson Wyatt, and one of the seven authors of the study, said the range of experience on pension cost varies widely among companies: from a 60% reduction in pension costs to a 53% increase.
Many of the companies reporting increases in pension costs had planned cutbacks in retiree health care benefits and sought to assuage the reductions by raising benefits under their cash balance or hybrid plans to provide employees the wherewithal to pay new premiums, he said.
In terms of shareholder returns, the typical company's results improved after making the conversion. But Mr. Schieber cautioned these improvements are tentative, considering the small size of the sample and the short timeframe.
Saving money low on list
Among the study's findings:
* 45% of the employers surveyed realized some cost saving from converting to cash balance or other similar hybrid plans.
* 37% saw costs rise.
The reasons most frequently cited for adopting hybrid plans were:
* to improve employees' appreciation of the plan, cited by 96% of employers in the survey;
* to facilitate communication about benefits, 93%; and
* to show lump-sum value of benefits, also 93%.
Reduction in plan cost was far down the list of reasons, cited by only 39% of employers.
"The popular notion that employers shift to cash balance plans largely for cost reasons is not supported by the facts," said Mr. Schieber in a statement.
That notion surprised him at first, Mr. Schieber said in an interview. "Undoubtedly some companies are using it to reduce cost. But it's only one element in the rich fabric of what's going on."
A large part of staying competitive is finding ways to attract and retain workers in a tight labor market.
"The cash balance shift is about redistributing retirement dollars democratically among workers," he stated in a summary of the study. He cited the more mobile work force of today and the portability of cash balance benefits.
The study analyzed the benefit provisions of 78 hybrid plans, 47 of which were cash balance plans and 31 of which were pension equity plans, which are similar in design and purpose. In all, the study said, the plans analyzed represent about 20% of the 400 to 500 such hybrid plans in existence.
The study looked at the cash balance phenomenon on several levels, including:
* financial implications on companies and shareholders;
* effects on the benefits of workers, particularly younger and longer-serving, older workers;
* competitive operating environment, where increasingly more companies offer defined contribution rather than the more complex and costly traditional defined benefit plans;
* tougher pension regulatory climate, including funding restrictions; and
* changes in Social Security benefits, likening the cash balance conversions to the cutbacks in Social Security, such as by raising retirement age beyond 65 for full benefits, as a means to save money in the government program.
The study was particularly critical of increasing pension regulations that have soured employers on defined benefit plans.
Mr. Schieber said he expects to see more companies convert traditional defined benefit plans to cash balance or other similar plans.
He said he is perplexed by the intensity of the criticism about the conversions. If they were motivated primarily by cost reasons, he noted, companies could achieve more cuts by freezing their existing plans, or terminating them and having only defined contribution plans.
He doesn't expect to see, however, many companies without defined benefit plans starting cash balance or other hybrid plans. He noted, as the study does, these types of plans are still defined benefit. In the current pension regulatory environment and given intense market competition among businesses, he said, few companies are starting any kind of defined benefit plan.
Future conversions will be adopted with more care than earlier conversions, he said.
Won't fix everything
He doesn't expect this new "care" to satisfy all complaints among older employees about conversions. For example, companies are unlikely to extend the transition to eliminate all adverse impacts.
"If you are implementing a new strategic plan because market conditions change," Mr. Schieber said, "I don't think you can call it a strategy if it takes 15 year to implement."
He defended the redistribution of pensions assets to a more equal balance among workers.
"The fundamental question remains: Is it more fair to provide enhanced benefits to the vast majority of workers?," said Mr. Schieber in a summary of the study. "Or should companies continue to direct most benefit dollars to the relatively small minority of workers who stay with a single employer for 30 years?"
A "typical 40-year-old that leaves a firm after 10 years would walk away with 2.4 times the benefit under the new hybrid plan than he or she would have received under the old pension formula. . . But the average 60-year-old with 30 years of service would get only 78% of the benefit he or she would" have received under the old plan, according to the study.
"In some regards, this (conversion) is about turning a gold ring into a brass ring (for some longer-tenured workers) and for other people turning a lead ring into a ring with some value," Mr. Schieber said in the interview.
"What is fair is in the eye of the beholder."
He pointed out, as the study notes, 80% of workers hired at age 30 will not be with the same employer at age 55 and thus not earn top benefits under a defined benefit plan. Cash balance-type plans provide higher benefits than traditional plans for the many more workers who work at several companies during their careers.
For all of its charts and tables, the study doesn't go into great detail about the cost saving, or the increases, companies experience as a result of a conversion. It focuses mostly on contrasting benefits workers receive after the conversion compared to their previous plan.