PENSION & BENEFITS NEWS REPORTER
ISSN 1069-5117 BNA 3-7-06

(Vol. 33, No. 10) 599

Pension Reform:
Freezing Plans Has Major Implications
For Retirement Income, Speaker Says

BY MICHAEL W. WYAND

The trend of freezing or phasing out defined benefit pension plans has major implications for the provision of retirement income for future generations of retirees who currently work for employers that have pension plans, William Arnone, partner, Human Capital Practice with Ernst and Young, New York, said Feb. 27. ‘‘Even with such [defined benefit] plans, most of today’s employees are on a course of failure when it comes to planning for retirement,’’ Arnone told a Washington, D.C., Claude Pepper Foundation and Center forum. ‘‘The prospect of widespread retirement insecurity has daunting national economic, social, and political ramifications,’’ he said.

‘‘I am convinced that the major underreported story of the year is the disintegration of private pensions, with judges allowing bankruptcy laws to protect companies while depleting billions of dollars of workers’ retirement income,’’ Robert Weiner, president of Washington, D.C.-based Robert Weiner Associates, told the forum. Weiner was chief of staff for the House Aging Committee under then Chairman Claude Pepper (D-Fla.).

‘‘The pension system has created a middle class among retirees,’’ Karen Friedman, policy director for the Washington, D.C.-based Pension Rights Center, told the forum. ‘‘If this system is allowed to go down, people will lose their basic retirement security. The need to save pensions and to protect employees’ rights is greater than ever,’’ she said.

The forum focused on the disintegration of private pensions and was held to discuss the current ‘‘pension crisis,’’ according to a forum news release. Hundreds of major companies, including United Airlines, GM, IBM, Verizon, Sears, Hewlett Packard, Polaroid, AT&T, and Enron have reduced their guaranteed retirement plans or judges have authorized dissolution of pension funds, the news release said. ‘‘The trend threatens nearly all American seniors and their families, as well as younger workers,’’ it said.

Possible Solutions.

There were two possible solutions presented at the forum to address this trend. One was placing pensions in ‘‘third parties, in accounts untouchable by the companies themselves in order to guarantee their workers their deserved retirement,’’ Weiner proposed. This idea was also suggested by Vienna, Va.- based Awad Khamis Morgan, financial advisor for Ameriprise Financial Services.

The other was to give a boost to Social Security by increasing FICA taxes for those companies who exit the defined benefit pensionsystem, Arnone suggested.‘‘Let’s at least get something back for employees,’’ he said.

‘‘Whether the solutions lie in legislation, in new retirement savings options, or in changing corporate attitudes, we need to work together to develop creative solutions to maintain and promote pension plans,’’ Friedman said. She did note that the current pension reform legislation pending in Congress will not reverse the decline in defined benefit plans.

‘‘[Companies] simply jumping ship is not acceptable,’’ Shaun O’Brien, assistant director, Public Policy Department, for Washington, D.C.-based AFL-CIO, told the forum. ‘‘We need to find the right mix [to fix the problem],’’ he said.

Why Companies Freeze or Phase Out Plans.

‘‘Seventy-one large corporations froze or terminated their defined benefit pension plans in 2004, a 36.6 percent increase over 2003,’’ Arnone said.

‘‘Surveys indicate that more than one in five companies, and nearly one in three large companies with traditional final average pay pension plans, including financially sound employers with well funded plans, are considering freezing or phasing out their defined benefit pension plans,’’ Arnone said. ‘‘Only one new defined benefit pension plan with more than 1,000 participants has been created in the past decade,’’ he said.

According to Arnone, companies freeze or phase out defined benefit pension plans for many reasons, including:

* The traditional, final average pay plan is not a good fit for today’s mobile workforce;
* Younger workers do not value the defined benefit plan;

* The aging of the workforce combined with longer life expectancies results in rising pension costs;

* Low interest rates and the decline in the stock market have resulted in significant underfunding of plans;

* Accounting rules are changing with negative consequences;

* And some companies are at a competitive disadvantage competing with other companies who do not have such plans.

The Tallahassee, Fla.-based Claude Pepper Foundation and Center, a nonprofit corporation, was established by Claude Pepper in 1986. It supports and sponsors efforts to promote issues involving health care, Social Security, and retirement income. Pepper died in 1989.