ARLINGTON, Va. — The corporate commitment to defined benefit plans could be rebounding as their financial condition is improving.
A new study and a new survey by Watson Wyatt Worldwide Inc., Arlington, Va., show that the largest U.S. companies froze fewer plans in the past year than in the previous year and that the majority of corporations that still have pension plans are committed to keeping them.
A study of the 638 Fortune 1,000 companies that sponsor defined benefit plans showed that only 4%, or 25, froze their plans in the last 12 months, ended April 30. That’s down from 7% of the Fortune 1,000 firms that froze plans the previous year.
Cumulatively, 138 of the 638 companies have frozen or terminated their defined benefit plans, including the latest 25, according to the report.
The Fortune 1,000 ranks U.S. corporations by sales. The study is based on annual reports and other Securities and Exchange Commission filings in the year ending April 30.
A separate survey of 300 companies with pension plan assets of more than $100 million each found that 59% of these firms that have a defined benefit plan that is open to new employees “have made a formal decision to keep their plans open,” although often moving to hybrid plans, according to a Watson Wyatt statement. The remaining 41% of firms “have not indicated that they’ve made a formal decision about their plans.”
Watson Wyatt is still editing the studies and expects to release them later in August, said Ed Emerman, spokesman.
“Our data seems to indicate that perhaps plan freezes have peaked,” said Kevin Wagner, senior retirement consultant at Watson Wyatt. “We will see some companies continue to freeze plans. But perhaps the large number we saw in early part of this decade has slowed somewhat.”
“It’s a far cry from the doom and gloom that everyone was going to get out of DB plans in a few years,” he said. “There are companies that like defined benefit plans.”
A variety of factors have made pension plans much healthier now than even two years ago, Mr. Wagner said. Among the most important of those factors, the regulatory and legal environment is more stable, and funding rules are better understood.
“At lot of employers will stay with defined benefit plans, which is different from what the popular perception might be,” Mr. Wagner said. “You don’t hear that because companies don’t announce that they are continuing their plans.”
But while companies are retaining their plans, they aren’t necessarily doing so without making changes.
“As the demographics change in the U.S., the work-force patterns are different, so companies change retirement programs to respond to the needs a more mobile work force might have,” Mr. Wagner said. “Companies now feel more confident the legal environment can accommodate them in adopting hybrid plans, and there isn’t much risk in opening new hybrid pension plans.”
The Pension Protection Act of 2006 promotes creation of new hybrid plans by protecting companies from the age discrimination litigation, although the law says noting about previously created hybrid plans, Mr. Wagner said.
“From an employee standpoint, hybrid plans and defined contribution plans are both account-based programs that vest very rapidly,” he said. “But from the financial perspective of an employer, you see a difference. Companies are looking for an efficient why to provide retirement programs, and defined benefit plans are a more efficient way of providing retirement benefits to employees.
“It costs less to provide a dollar of retirement income in a defined benefit environment than in a defined contribution environment. When an employer invests in a defined benefit environment, it will outperform what an employee will earn in a defined contribution environment. Employers are more sophisticated and can hire the best people to invest, they have a long time horizon… But volatility goes with defined benefit plans; employers don’t like that but can manage around it.
“Defined benefit plans are more flexible than defined contribution plans... In good financial years, you can accelerate contributions and the tax benefits with them. You can do more effective tax planning with defined benefit plans “
Growing pension surpluses provide a disincentive to move away from defined benefit plans, Mr. Wagner said. “A number of defined benefit plans are now in a surplus position, contrary to the deficits they had a few years ago,” he said. “So companies already have assets set aside to pay for new pension accruals. If a company decides to freeze its plan, it can’t reach in to use the surplus to apply to defined contribution contributions.”
Although more firms are maintaining their defined benefit plans, very few are starting new ones, Mr. Wagner said. “The number of companies putting in new defined benefit plans is few and far between. We’re coming off too big of crisis for companies to feel the water is safe. People saw a tsunami in the water and aren’t ready to get into it.”
Because the makeup of the Fortune 1,000 companies changes every year — about 70 companies move in and out of the list annually — the 638 companies with pension plans in 2007 is slightly higher than in previous Watson Wyatt studies, said Brendan McFarland, research analyst.
In 2006 and 2005, 627 companies had pension plans. In 2006, 42 of the companies announced they were freezing their plans, bringing the cumulative total of the companies with frozen or terminated plans to 113. In 2005, 26 of the companies froze their plans, bringing the cumulative total of the companies with frozen or terminated plans to 71.
In 2004, 633 companies had defined benefit plans, and six of the companies froze or terminated their plans, bringing the cumulative number of companies with frozen or terminated plans to 45.
