Big Blue puts freeze on its U.K. plan

International Business Machines Corp.'s U.K. subsidiary is the latest among several leading companies to announce plans to reduce or eliminate pension benefits, underscoring growing concerns that the financial crisis is cutting off the oxygen supply for defined benefit plans.

Officials at the Armonk, N.Y.-based company already had frozen its U.S. DB plan as of Jan. 1, 2008, and moved all employees to a “401(k) Plus” plan, which is the largest corporate defined contribution plan in the country with about $30 billion in assets.

But the July 7 announcement to effectively make the same shift for U.K. employees represents one of the company's strongest attempts yet to remove DB burdens from its overseas operations. IBM employees in the U.K. are being asked to move into an “enhanced” DC plan whereby IBM promises to make a higher-than-average contribution if employees agree to give up the right to all future defined benefit accruals.

In general, company officials “are presented a difficult situation, both from a cost and a human resources point of view,” said Christopher Mayo, London-based senior consultant at Watson Wyatt Worldwide.

“Not only do they have to ask whether they can afford DB in the long term, but there's also a question of fairness. If you have two employees working side by side but with great disparity between them (in terms of pension benefits), there's increasing pressure to justify the higher cost for one employee and not the other,” he said.

IBM had closed its £5 billion ($8 billion) U.K. defined benefit pension plan to new participants in 1997. In the decade that followed, a majority of U.K. corporations followed suit, consultants said.

But since the global recession hit, several major companies have announced plans to go a step further and freeze their DB plans in the U.K. In May, Tokyo-based Fujitsu Ltd. announced plans to freeze its U.K. defined benefit plan, which has about £2 billion in total assets. London-based Barclays PLC made a similar move the following month with its £9.5 billion plan.

Even where DB was thought to be relatively safe because of strong funding and solid corporate profits or because of political reasons, it isn't.

Officials from BP PLC announced in June that all employees who join the company after April 1, 2010, will be offered only a DC plan. The BP Pension Fund, London, had $18 billion in assets at the year-end 2008 and reported a $1.6 billion surplus. Officials at Royal Mail Group Ltd., London, also have announced they were exploring options that include freezing the company's £20 billion defined benefit plan. The Royal Mail fund's deficit totaled about £6.7 billion at the end of March.

“These companies are using the pretext of the economic crisis to railroad future pension benefits,” said Peter Skyte, national officer at London-based Unite, the U.K.'s largest union, which represents workers at IBM, Barclays and Fujitsu. “It's an excuse, not a necessity. Many of the companies (that have cut DB pension benefits) are still highly profitable.

“We're very concerned that once a major company makes this sort of an announcement,” Mr. Skyte added, referring to IBM, “others will follow and it becomes a race to the bottom” to end DB benefits, particularly within the same industry.

At IBM, competitiveness was a main driver behind the company's decision to freeze the U.K. DB plan.

“In the wake of a volatile economic environment, pension schemes around the world and here in the U.K. are being assessed by many companies for affordability and long-term sustainability,” according to an e-mail sent to IBM's U.K. employees from Brendon Riley, IBM United Kingdom and Ireland general manager, concerning the company's plans to freeze its pension fund.

“Recent trends in the economic environment have now accelerated the need for IBM UK to take further steps to mitigate the impact of these external factors and enable the company to retain its leadership position moving forward.”

Under British regulation, any attempts to change employee pension benefits in the U.K. must include a consultation period of at least 60 days. In the case of IBM, the consultation period will begin Aug. 5, during which time employees can object to any proposals. However, companies usually prevail in implementing the proposed changes, said sources who spoke on the condition that they not be identified.

Furthermore, if successful in freezing its U.K. pension plan, IBM may likely take more aggressive steps to end its DB obligations elsewhere in Europe. For example, IBM's DB plan in Germany is also one of the company's largest outside of the U.S. with an estimated €5.9 billion ($8.2 billion) in assets. Officials there have proposed that employees who join the company after Aug. 1, 2009, will not be offered any pension benefits, according to Rolf Schmidt, German trade union Verdi's representative in charge of IBM. Ursula Diel, spokeswoman for IBM based in Stuttgart, Germany, did not return e-mail and telephone requests for comment.

“The law in Germany is that only DB plans are accepted,” said Mr. Schmidt, who is based in Berlin. “That's why (IBM officials) decided that new employees will have no pension plan — nothing ... We want to find a way for all employees who will be joining the company to have some kind of a pension plan, but it's difficult because we cannot organize solidarity” because those affected are not yet IBM employees.

In the U.K., employers have saved up to £4.5 billion annually in pension contributions by moving employees to DC plans from DB, according to a research paper published earlier this year by MGM Advantage, Worthing, England, which advises individuals on retirement issues. The average contribution from an employer to a DB pension is about 15.6% of annual salary compared with 6.5% for DC, according to the paper.

However, IBM officials are attempting to boost benefits in their “enhanced” DC plan. Under the plan, IBM will match up to 10% of an employee's salary compared with the company's current 8% match. To qualify for the full match, employees will have to increase their contributions to 5% from the current 3%. Employees who contribute 3% of salary will continue to get the 8% company contribution.

Barclays officials also are offering a beefed up DC plan with at least a portion of the pension savings to be inflation-protected up to 5% annually and “guaranteed not to go down in value,” according to information provided by the company.

Mr. Mayo of Watson Wyatt added: “I think we'll continue to see a gradual drip of companies making announcements (to freeze their DB plans) for some time.”