NEW YORK -- Media giant Viacom Inc. might borrow an act from newly acquired CBS Inc. and remake its $974 million traditional pension plan into a cash balance plan.
In April 1999, CBS converted its $4.16 billion defined benefit plan into a cash balance plan before freezing it, so that new employees would get generous stock option grants and coverage in the 401(k) plan, but no pensions. Older employees still would receive pensions from the old-fashioned pension plan.
A Viacom spokeswoman said the company is reviewing its benefits programs, but no decisions have been made yet.
Merging companies typically adopt a cash balance plan when one of the companies has one. This is especially true if the merged company intends to signal that it is more focused on a pay-for-performance culture rather than a seniority-based system.
"I would expect the hybrid plan to be the survivor," said a pension consultant who did not wish to be identified.
Converting its traditional plan to a cash balance plan and emphasizing stock options also might appeal to Viacom because such conversions sometimes help companies cut benefit costs.
CBS anticipates saving $75 million over the next decade by converting to a cash balance plan, a spokesman said. It could have saved even more, but it offset some of the savings by changing its actuarial assumptions. (The firm pared its expected return on its pension assets to 8.2% in 1999 from 9.5% in 1998 and jacked its expected increase in compensation to 5.5% in 1999 from 4% in 1998. The nation's largest 100 companies assume a 4.5% average increase in compensation costs.)
(A company spokesman said the change in the actuarial assumptions reflects the first full year of the merger of CBS' pension plan with that of Westinghouse Electric. Westinghouse bought CBS in November 1995.)
One reason why CBS might have assumed conservative actuarial assumptions is because Westinghouse had been rapped on its knuckles by the SEC in 1993 for assuming too high a interest rate to value its pension liabilities at a time when interest rates were falling.
The cash balance conversion also slashed the company's pension cost from $178 million in 1998 to $95 million in 1999; its service cost, or the cost of benefits earned by employees last year, dropped by $24 million to $34 million. At the same time it converted its traditional pension plan to a cash balance plan in April 1999, CBS also rolled out a broad-based stock options program for all employees and linked the employer match on its 401(k) plan to its stock performance.
The 401(k) plan had assets of $1.2 billion at the end of 1998, the latest publicly available data.
The company also added an investment option -- the Infinity company stock fund. The company had taken its Infinity broadcasting business public in December 1998.
Apart from that fund, and company stock -- previously in CBS and now in Viacom -- options are: a stable value fund managed by PRIMCO; three lifecycle funds managed by The Vanguard Group; an S&P 500 index fund managed by Barclays Global Investors; an active U.S. equity fund managed by J.P. Morgan Investment Management Co.; a domestic small-cap equity fund managed by Dimensional Fund Advisors Inc.; and an international equity index fund managed by State Street Global Advisors.
Meanwhile, CBS openly told its existing employees that the cash balance conversion probably would result in lower pensions for most, except the oldest employees. But the information provided to employees also stated that if the company's stock appreciates at 10% a year or more, the value of an employee's assets could be at least as much as they would have been under the previous plan. The handouts did not say what would happen if the company's stock price declined and the stock options expired worthless.
CBS' stock price has climbed steadily under Mel Karmazin, who became chief executive in January 1999. It reached a high of 6315/16 in 1999, and closed at 583/4 on May 3, the last day it traded before merging with Viacom.
Sumner Redstone, Viacom's chief executive, now heads the merged company.
At present, only some Viacom employees are eligible to receive stock options. Viacom already has increased the number of investment options in its $619 million 401(k) retirement plan to 19 in February, from nine previously.