SAN ANTONIO, Texas - SBC Communications Inc. is converting its $9 billion defined benefit plan to a cash balance plan June 1.
Only the benefit formula for non-union management and salaried employees will be changed. SBC does not expect to make investment management or asset allocation changes.
And, according to an SBC spokesman, fund executives have not yet determined how the Pacific Telesis Group's $11.7 billion in defined benefit assets will be incorporated with SBC's plan. SBC completed its acquisition of Pacific Telesis in April. PacTel, San Francisco, already has a cash balance plan for non-union employees.
With the change, SBC becomes the sixth regional Bell operating company to convert to a cash balance or hybrid plan.
NYNEX Corp., New York, is the only holdout. NYNEX, however, is merging with Bell Atlantic Corp., Philadelphia, which converted its $5.8 billion non-union plan to cash balance on Jan. 1, 1996. And sources have said they expect Bell Atlantic's pension operation to dominate following the merger, so NYNEX employees someday could wind up with a cash balance plan.
BellSouth Corp., Atlanta, was the first baby Bell to adopt a cash balance plan, in July 1993.
AT&T Corp., Berkeley Heights, N.J. - from which all seven operating companies were spun off in the early 1980s - is converting its $10.6 billion management plan to cash balance effective Jan. 1, 1998, the largest plan yet to switch to cash balance (Pensions & Investments, April 28).
Cash balance plans offer more portability than traditional defined benefit plans by allowing lump-sum distributions for vested participants. In addition, they are communicated as individual account balances, similar to a defined contribution plan.
U S WEST Inc., Englewood, Colo., converted its management and non-union employees' pension plans to a pension equity plan in January. The pension equity plan is a hybrid similar to cash balance but with a different benefit accrual calculation.
Cash balance plans are front-loaded, benefiting shorter-term workers; benefits accrue on a more "age neutral" basis than traditional final-average-pay pension plans. PEPs provide a relatively even accrual of benefits, making them more attractive for companies with more midcareer hires or fast-track employees with rapidly rising salaries.
Ameritech, Chicago, has a pension equity plan for its non-union workers.
At both SBC and U S WEST, only non-union employees will convert to the new plans, even though the defined benefit fund is for both union and non-union employees.
Non-union and management SBC employees will have different benefit formulas based on the cash balance approach, while union workers will continue to receive negotiated plan benefits, a spokeswoman said.
Joe Vogl, consultant with Towers Perrin, St. Louis, said some companies are combining plans for investment and reporting purposes while offering different benefit plan designs for certain classes of workers.
Roger Wohlert, managing director-finance and assistant treasurer, said SBC is adopting the cash balance approach because it is more attractive to employees and aids in recruitment and retention.
"It is attractive to employees, and the work force seems to want the ability to take lump sums with them when and if they leave the company," he said.
Mr. Wohlert said eligible employees will have a five-year window to elect to choose benefits based on the cash balance plan or the traditional plan. At the end of the five years, those who have not switched would be converted. The accrued benefits at that time would become the minimum accrual under the cash balance plan, according to an SBC spokeswoman.
Mr. Wohlert said SBC elected to convert to cash balance "because it provides greater benefits for those with less service, where under the old plan benefits didn't accumulate as fast in the earlier years and workers had to wait until they became pension eligible."
Some consultants prefer the pension equity plan, sometimes called a defined lump-sum plan. Said Tim Marnell, principal and senior consultant with Towers Perrin, Chicago: "I have never been that fond of cash balance plans." Mr. Marnell said cash balance plans "do not react" to employees who join a company at a younger age and experience rapid pay increases.
"Retirement plans should provide replacement pay closer to retirement. Cash balance plans treat fast-track employees the same as a plodder."
Mr. Marnell said under a pension equity plan, if an employee was credited with 4% of pay and worked for 20 years, the account balance would be equivalent to 80% of final average pay (4% times 20 years), whereas under a cash balance plan, the account would reflect 4% of pay for each year worked.
"The difference is that (cash balance) indexes each year the same for everyone at the same rate, the other (PEP) indexes pay increases to the final average pay," said Mr. Marnell. PEP, therefore, provides income replacement benefits closer to that being received at retirement.
Mr. Marnell said he is not surprised the telecommunications industry has embraced cash balance and other hybrid alternatives.
"It is an industry in transition right now. The old Bell mentality that you are hired out of school and work until you retire is no longer the case," he said.
Mr. Marnell said there are cost savings by converting, but he added that the cost isn't usually the principal reason for making the change.
"Overall, I believe they (cash balance) plans are less costly in the long run because overall, benefits are less under these plans than under traditional defined benefit plans," said Mr. Marnell.
For example, he said, a cash balance plan retiree might receive a lump-sum offer of $200,000, while under a defined benefit plan, the same employee might receive an annuity of $2,000 per month.
"As an actuary, I know the $2,000 per month is more valuable than the lump sum. . . . There is no question that companies are paying less benefits overall with these plans."