United States Steel Corp.'s freezing of its defined benefit plan puts it on a path to ending a pioneering retirement program that led to a transformation of both employee benefits and investment management.
The freeze to the $6.3 billion pension plan, which was announced by Pittsburgh-based U.S. Steel on Aug. 21, comes as no surprise to consultants and academics. Corporations have been moving away from defined benefit plans for much of the 2000s, generally first closing plans to new employees, as U.S. Steel did in 2003, and then freezing pension accruals for all active participants. By replacing traditional DB plans with defined contribution plans, companies could transfer market risk to workers and reduce corporate liability.
At the beginning of 1998, 299 companies on the Fortune 500 list offered defined benefit plans to new hires, according to a Towers Watson & Co. analysis. By June 30, 2014, that number had fallen to 111 companies. Over that same time frame, Fortune 500 companies offering only defined contribution plans rose to 389 from 195, according to the Towers Watson analysis.
“It's almost time to erect a headstone for corporate defined benefit plans,” said Jeremy Gold, consulting actuary and principal, Jeremy Gold Pensions, New York.
The U.S. Steel freeze is effective Dec. 31 for non-union participants in its pension plan, who will be moved to a defined contribution plan. The defined benefit plan is 87% funded, with $7.3 billion in pension obligations.
U.S. Steel executives couldn't be reached for comment.
The corporate embrace of defined benefit pensions has weakened for a number of reasons. Corporations faced pressure from a number of economic shifts, including funding demands from an almost steady drop in interest rates that raised the cost of pension liabilities; increasingly tougher funding rules under amendments to the Employee Retirement Income Security Act of 1974; economic shifts that weakened companies with large DB plans; and workforce trends encouraged more transitory employment less suitable to the longer-term basis of DB plans.