CHICAGO - Industry experts aren't sure how to evaluate Boeing Corp.'s proposed pension increase, either in terms of impact on the corporation's finances or generosity to employees when many other companies are cutting back defined benefit retirement plans.
The 25,000 employees represented in contract negotiations by the International Association of Machinists and Aerospace Workers voted late last week on the company's proposed contract, which included a 16% hike in pension benefits.
"Adopting a 16% to 20% monthly benefit enhancement, on top of required higher contributions needed for funding, could get pricey" for the company, noted Olivia S. Mitchell, executive director, Pension Research Council, and professor at the Wharton School, University of Pennsylvania, Philadelphia.
Shlomo Benartzi, assistant professor of accounting at the Anderson School, University of California at Los Angeles, said, "It's very difficult to predict what would be a good deal" for workers.
"In my experience, companies often just defer the problem," he added. CEOs can conserve "cash by promising pensions that are funded over many years."
"The concern for shareholders is promises are being made that eventually have to be paid," Mr. Bernartzi said. "It's important how this is presented in financial statements."
Return hard to meet
Boeing used a 9.25% investment return assumption on pension fund investments in 2001 and 2000. Mr. Benartzi said that expected return will be hard to meet in the current market. "Boeing is increasing promises, but putting a fraction of it on its books," he said.
Boeing has the seventh largest U.S. corporate defined benefit fund, with $33.8 billion in assets, according to data collected by Pensions & Investments (P&I, July 8). In aggregate, its plans are slightly more than $1 billion overfunded, with $32.7 billion in pension liabilities. Boeing doesn't break out data for each of its plans, although it notes in its annual report that "all major pension plans are funded." The annual report points out that two plans for hourly employees are underfunded.
Boeing in 2001 made a $19 million contribution, and employees made a $12 million contribution, according to the annual report.
Dick Schneider, chief negotiator for the Machinists union in the Boeing talks, said in a statement: "The Boeing pension fund is ... so overfunded that Boeing hasn't had to contribute any money to the fund since 1997. Yet, members at Boeing retire under the current plan at less than half the income they made while working."
Boeing and union officials didn't return calls for comment.
"Boeing's DB plan is likely to already be hurting from the stock market's poor showing," Wharton's Ms. Mitchell noted. "Hence it's likely the company will have to up contributions to keep funding levels in good shape."
Boeing is proposing raising the monthly pension benefit rate 16%, to $58 a month for each year of employment. That would increase to $60 a month by 2005, for a total 20% increase in pensions over the three years of the proposed contract.
"What the union is saying is that (16%) isn't enough," said Teresa Ghilarducci, associate professor of economics, University of Notre Dame.
Norman Stein, visiting professor of law, University of Maine, Portland, said, "If pensions are not inflation-adjusted, members of the union may be concerned about what they will be living on in retirement."
"It seems farsighted for the union to press pension issues," he said.
`A huge plus'
Edward N. Wolff, professor of economics, New York University, said, "In general, the fact that it has a defined benefit plan is a huge plus for employees. Companies have been abandoning defined benefit plans for 401(k)s. From that point of view, it (the proposed pension increase) sounds like a good deal. But I can't say how it compares with pension plans" at other companies.
Alicia H. Munnell, director at the Center for Retirement Research and professor of management sciences at Boston College, Chestnut Hill, Mass., said, "Some people talk of the defined benefit plan being without risk." But if the plan's investments decline, the company will have to contribute more, taking money away from operations and potentially reducing wages and employment, she said.
"Defined benefit plans are very valuable things to have," she said. "We talk about the shift of investment risk to individuals, but the last two years (of negative returns) have driven home what that risk is. Having the employer bear the risk is a nice advantage for employees to have."