Law May Hasten Decline of Pensions
By Jonathan Peterson
Times Staff
Writer
September 4, 2006
WASHINGTON — When chemicals titan DuPont
announced plans last week to scale back its traditional pension program, it
became the third large employer to reduce retirement benefits since Congress
passed the Pension Protection Act of 2006 on Aug. 3.
The changes had been
brewing long before that day. But the flurry of cuts reflect a larger reality:
The pension system is in hasty retreat, and little in the new law is likely to
stop the trend.
"I think this is the tip of the iceberg. You'll probably
see a lot of companies freeze their plans in 2007," said Lynn D. Dudley, vice
president of retirement policy for the American Benefits Council, whose members
include large corporations.
Although the 907-page bill was touted as an
effort to stabilize the pension system, Dudley maintains that aspects of the
law, along with impending regulatory changes, will only accelerate the demise of
old-style pensions that guarantee steady income as long as retirees
live.
"Certainly, nothing in this legislation served as an incentive for
anyone to keep their plans," she said. "The American people should know this is
a real missed opportunity."
Delaware-based DuPont, known for generous
employee benefits, said its traditional pension would be off-limits to new
workers starting next year. In 2008, the company will change its pension formula
for current employees, lessening their payouts in retirement.
The move
followed pension freezes by Tenneco Inc., an auto parts maker in Illinois, and
Blount International of Portland, Ore., which makes outdoor work and industrial
equipment. All the companies said they would improve their employees' 401(k)
savings plans.
The cutbacks are just the latest among many by U.S.
corporations that are phasing out costly traditional pensions in favor of 401(k)
accounts and similar plans that provide retirement nest eggs but don't guarantee
a monthly check for life.
Separately, bankruptcies by major companies
such as UAL Corp., parent of United Airlines, have put pressure on the Pension
Benefit Guaranty Corp., the federally chartered company that assumes pension
obligations when employers terminate their programs.
The Pension
Protection Act was designed to address both issues as well as to close loopholes
that gave corporations substantial leeway in meeting funding
obligations.
Under the new law, companies are expected to fund 100% of
their pension commitments, up from 90%. To shore up the safety net for workers,
the law encourages employers to strengthen their 401(k) plans and clarifies
legal issues to make it easier for companies to convert their pension programs
into "cash balance" plans, which are similar to 401(k)s but retain some of
traditional pensions' benefits.
Retirees' advocates, however, say the
stricter funding rules may backfire by encouraging companies to freeze their
pension programs rather than bear the burdens of compliance.
On top of
that, tougher pension accounting rules are scheduled to take effect at the end
of this year. The Financial Accounting Standards Board will require companies to
include pension funding obligations in their balance sheets, potentially
reducing some firms' net worth.
"What these changes do is underline the
costs that a company has to accept when they sponsor a [traditional] defined
benefit plan," said Charles Ruffel, chief executive of Plansponsor, a trade
publisher for the benefits industry. He added: "In order to save defined benefit
plans, [the government has] accelerated their demise."
Companies that
reduce their pension commitments often improve their 401(k) savings plans,
typically by kicking in more money. Workers are able to take such accounts with
them if they change employers, unlike old-style pensions. Employees who job-hop
frequently might not be with one company long enough to ever qualify for a
pension.
"A lot of people aren't sure they're going to spend their whole
careers with one company, and they like the idea of a benefit that they can
transport to another company," said DuPont spokeswoman Lori Captain. "The market
is changing. There are clear trends moving in this direction."
Still,
some worry that workers will be hurt by the changes. Many employees fail to
enroll in 401(k) plans. For those who do, their savings goals can be undermined
by poor investment choices or stock market performance. Decisions to withdraw
money can hammer the long-term value of the account. Older and less sought-after
workers may not enjoy the advantages of mobility.
"What this does is put
another big burden on the employees," said Jim Flickinger, president of the
International Brotherhood of DuPont Workers.
The company's enhanced
401(k) plan, he said, holds more allure for career managers who move from one
corporation to another than for factory workers who expect to stay put and have
planned on a predictable income in retirement.
"The manufacturing people
are the ones who have to take the hit," Flickinger said.
All agree that
the latest corporate cutbacks reflect a worldview in which traditional pensions
— once seen as a way to lock in a loyal and able workforce — are viewed as
costly weights on a company's competitiveness.
DuPont pointed out that
its pension plan changes were likely to boost earnings by 3 cents a share next
year and 5 cents in 2008. Blount predicted savings of $16 million to $23 million
over the next five years.
Tenneco, which makes shock absorbers, tailpipes
and other auto parts, said its pension changes would save $11 million a year
before taxes.
"We operate in a very tough environment, a very competitive
environment," said Jane Ostrander, spokeswoman for the company in Lake Forest,
Ill. "This is one piece of that ongoing effort to get our arms around these
costs."
In such a climate, the pension bill posed a challenge for
lawmakers.
The White House sought much stricter rules to prevent plan
failures — and the possibility that such failures could lead to a taxpayer
bailout of the privately funded Pension Benefit Guaranty Corp. Legislators,
meanwhile, were struggling to find the balance. Stronger rules were in order,
but too much pressure could lead companies to bail out of pensions
altogether.
"This bill will not only safeguard the retirement security of
millions of working families, it will also protect the interests of taxpayers
who could be on the hook for a multibillion-dollar bailout of the Pension
Benefit Guaranty Corp.," House Majority Leader John A. Boehner (R-Ohio) said
after Senate passage.
Boehner aide Kevin Smith said criticism from
corporations should be viewed in perspective.
"The grumbling from the
business community comes as no surprise, since their lobbyists have long argued
for more lenient funding requirements for employers," Smith said. "The president
and bipartisan majority in Congress stood by workers and refused to water down
the bill."
Nonetheless, disappointment with the bill, which President
Bush signed Aug. 17, is not limited to employers.
"The bill did nothing
to prevent companies from dropping out of the system or provide incentives to
stay in the system," said Karen Friedman, policy director of the Pension Rights
Center. "That really is the big issue now. How do we keep companies in the
ballgame?"
Copyright 2006 Los Angeles Times |