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.