Consultant PricewaterhouseCoopers LLC is practicing what it preaches -- adding to its own cash balance pension plans the bells and whistles it designs for others.
And, in a separate development, Lucent Technologies Inc, Murray Hill, N.J., is setting up a cash balance plan for all of its new U.S. employees.
PricewaterhouseCoopers is gussying up its cash balance plans, with combined assets of about $1.1 billion, before merging them into one.
The firm, which has been pushing the envelope on innovative cash balance pension plan designs for its clients, has three plans of its own: a second-generation plan covering Pricewaterhouse employees that was set up in the mid-1990s; a separate, plain-vanilla one that covers employees of the former Coopers & Lybrand accounting firm, which Pricewaterhouse acquired in July; and a third for former employees of Kwasha Lipton, an earlier Coopers acquisition. Kwasha was one of the first companies to set up a cash balance plan.
In a typical cash balance plan, the employer continues to manage the underlying assets of the defined benefit pension plan, but credits each employee's hypothetical account by a percentage of pay. The employer also determines the return on each employee's account, frequently linked to the yield on long-term Treasury bonds.
In fact, these accounts exist only on paper, and the employer continues to use professional money managers to invest the underlying assets, hoping to best the return it offers participants, and pocket the difference. Some of the newer generation of cash balance pension plans, such as the one Pricewaterhouse set up some years ago for its own employees, could give employers an even bigger arbitrage by tying the return on employees' accounts to investment options they pick, usually mirroring the investment options in their 401(k) plans.
Employer could profit
Assuming some employees pick conservative investment options, such as money market funds, currently returning around 5% annually, and the employer invests the money in the Standard & Poor's 500 stock index fund (which has had a 11.5% runup already this year), the employer could pocket the difference. Moreover, participant-directed cash balance plans, which have been adopted by fewer than six employers so far, are controversial because employees could conceivably lose all their retirement money, depending on how their investments fare.
PricewaterhouseCoopers' remodeling, expected to be completed by the end of the year, will affect only 19,000 employees who worked for Coopers and Kwasha before the acquisition. After the revamp, the Coopers and Kwasha pension plans will be folded into the Pricewaterhouse plan.
"The harmonization of the prior plans is still under study and subject to approval by the firm's governance bodies. We expect that process to be completed by the end of the year," said a company spokeswoman. Executives declined to comment about the changes officially, but some discussed them in private conversations.
The plan gives employees the choice of investing their hypothetical accounts in 17 options. According to the plan description employees received in December, employees' accounts are credited with an employer contribution of 5% of pay -- which includes overtime and bonuses -- up to the ceiling of $160,000 as determined by law. Directors' accounts are credited with 7% of pay.
Many of the choices, including S&P 500 and Russell 2000 index funds, mirror those available to employees through the firm's 401(k) retirement plan.
The Pricewaterhouse participant-directed cash balance plan had received the official nod from the Internal Revenue Service when it was set up. Such approval protects employers if the IRS later raises questions about their pension plans.
But what has not been worked out, according to sources who declined to be identified, is the sticky business of calculating transitional benefits Kwasha and Coopers employees will receive as part of the move to the Pricewaterhouse plan.
Thus, Kwasha and Coopers employees do not know how their opening account balances in the new plan will be calculated.
The Lucent plan, which kicks in on Jan. 1, 2000, will cover thousands of U.S. workers at 21 companies Lucent has acquired since October 1996. Two of the acquisitions are still pending. None of the acquired companies had traditional pension plans. The cash balance plan, which the company is referring to as an "account balance plan," also will cover non-union employees hired after Jan. 1, 1999.
Lucent is not tinkering with the $45 billion traditional defined benefit pension plan covering existing employees. It is setting up a cash balance plan because younger workers prefer these hybrid plans to stodgy traditional pension plans.
Lucent is adopting a plain vanilla cash balance plan and will credit employees' accounts with an undisclosed guaranteed fixed interest rate. Employee accounts also will be credited with between 3% and 10% of pay; the percentage gets higher as workers get older.
Lucent designed the new pension plan in-house with help from ASA Inc., a Somerset, N.J., actuarial consulting firm that, like Lucent once was an AT&T subsidiary.The company is not planning to make changes anytime soon in how the plan assets are invested, the spokesman said.