One year after IBM reopened its defined benefit plan, other employers with similarly frozen plans are discussing their options but as yet have no plans to reopen them.
However, some workers are becoming more vocal about their desire for traditional defined benefit plans, as seen in the recent machinists strike against Boeing Corp., in which the reopening of the frozen DB plan was a sticking point.
In February, the National Institute on Retirement Security released a report showing 82% of Americans surveyed believe all workers should have a pension and 65% of agreed that pension plans are better than 401(k) plans at achieving retirement security.
“Even as a proponent (of DB plans), that was kind of shocking to me to see that level of support for pensions from the worker side," said John Lowell, partner at October Three Consulting, an actuarial consulting firm specializing in defined benefit and cash-balance plans.
While Lowell is aware of a number of organizations discussing such actions, the likelihood of some companies actually implementing them depends in large part on whether those are privately held or publicly-traded entities.
“In the public company space, I think we’re seeing a bigger obstacle, and that is that they have to manage quarterly earnings, and the financial accounting volatility has always shown up as a barrier,” said Lowell.
Lowell said another barrier is that such decisions often start at the chief financial officer level, and CFOs may not be familiar with some of the structural innovations available.
“Private companies, on the other hand, tend to be much more about cash flow,” said Lowell. “They don't have those shareholders out there where they have to have quarterly meetings and say we met our target (or) we didn't meet our target. And so I'm certainly seeing more interest among the private companies in either looking at pensions one way or another, reopening (them or) starting new ones, and looking for innovative solutions.”
Michael Moran, senior pension strategist for Goldman Sachs Asset Management, said that corporate pension funding has continued to improve in 2024.
More plans have attained surpluses, and according to GSAM’s latest Corporate Pension Monthly report, as of Oct. 31 the estimated average corporate pension funding ratio was 107.2%.
“I would say when IBM made that announcement, it certainly kicked off a number of conversations with clients around how to think about use of surplus and how to think about reopening their plans,” said Moran. “In general, interest from plan sponsors in reopening their plans remains muted. IBM was obviously in a unique situation being $5 billion overfunded and having a completely frozen plan, so it was a very good use of surplus for them. Some others are not in that same situation.”
As of Dec. 31, IBM’s U.S. pension plan assets totaled $24.44 billion, while projected benefit obligations totaled $19.85 billion, for a funding ratio of 123.1%, according to its most recent 10-K filing.
It was the surplus that likely enabled the company to announce in November 2023 it was reopening its defined benefit plan by scrapping its 401(k) corporate match and replacing it with a cash balance component called a retirement benefit account.
“Interestingly, the IBM decision was, at least as far as we know, driven almost entirely by management and was not driven by a lobbying campaign by the plan participants to reopen,” said Jared Gross, managing director, head of institutional portfolio strategy, at J.P. Morgan Asset Management.
IBM has not addressed the reason for the change and did not return requests for comment.
Benefits to IBM, Boeing
On that basis, Gross said the decision to reopen the DB plan was grounded in some kind of corporate finance principles that were beneficial to IBM.
“Now that doesn't mean that the sponsor benefiting and the participants benefiting are mutually exclusive,” said Gross.
"That is one of the lessons of defined benefit plans: The key difference between a DB and a DC is that the returns on the assets are often thought of as belonging to the sponsor, but in reality, that benefit is shared between the sponsor and the participants, because it allows the sponsor to provide, essentially, a more generous benefit, or a benefit that would be difficult to locate in the markets outside of the DB structure,” said Gross.
The gains on the assets that IBM invests enable the company to offer benefits at a lower cost than doing it out of pocket as they would in providing a company match in the 401(k) plan, Gross added.
Machinists who walked out on strike in September were pushing to have the DB plan reopened. But in the ratified contract, Boeing instead agreed to an improved company match in the 401(k) plan.
Boeing said repeatedly it would not reopen the frozen DB plan, and instead in the final offer approved by workers the company increased the employer match in the 401(k) plan to 100%, up from 75%, of the first 8% contributed, and included a special company retirement contribution of 4% into the 401(k) plan.
“Boeing wound up giving them a tremendous potential amount of money in the 401(k). They're probably potentially spending more, if the workers defer enough to get the full match right in the 401(k) plan, than they would be in a pension plan,” said October Three’s Lowell.
Lowell said that he did not know the specifics of the union’s demand to reopen the pension plan, but he said he would have suggested instead to take the words “defined benefit pension” off the table.
A Boeing spokesperson did not return requests for comment.
“Tell me in your words what you really want,” said Lowell, “and I think what they would have said is, we want to accrue a lifetime income benefit that Boeing is paying for. I don't know that because I didn't talk to any of them, but I really think that's what they would have said. So the question I would have asked them … suppose I can get you that, but we don't call it a defined benefit pension. Are you willing to look at the offer, right? And I would hope they would say yes. Eventually, they they said yes to something that didn't look like that at all.”
Similarly, Lowell said, he would have gone to Boeing and said instead of calling the plan a pension, concentrate on providing a lifetime income efficiently.
“Suppose I give you something that doesn't create those problems, but gives the union what they want,” said Lowell. “Is it possible that would be on the table? I think there's so much here that defined benefit and pension have just become very nasty words in bargaining, and I think that was a lot of the problem. There are pension designs that didn't exist when the IAM first got its pension from Boeing, and none of those, that I'm aware of, came to the table.”
