The High Cost of Pension Losses

Over 40 percent of companies are making basic changes to their defined benefit plans or considering them, study finds.

Forty percent of 80 mid-sized and large companies surveyed by Deloitte & Touche LLP said their pension expenses will rise by more than 50 percent in 2003.

Another 20 percent expect increases of 26 percent to 50 percent. Around 16 percent of the respondents see expenses growing between 11 percent and 25 percent.

The big rise is due mostly to funding shortfalls. More than four out of 10 companies are either making or considering making fundamental changes to their defined benefit plans, according to D&T.

In fact, 12 percent have already decided on changes and 31 percent are evaluating possible alternatives, such as changing to cash-balance or profit-sharing plans, according to the survey.

“Companies that change their pension plans solely because of stock-market volatility and the current higher expenses could be making a serious mistake,” says David Hilko, a benefits consultant at Deloitte & Touche. “Recruiting and retention strategies should drive benefits.”

“Changes now won’t fix the funding issue,” Hilko added. “The companies still must make up these major shortfalls under IRS rules. What’s more, benefit expenses often rise in the short term when companies switch plans, which would simply add to the current expense crisis.”

D&T said companies are also increasingly interested in securing an executive’s retirement benefits.

It noted that nearly one in three companies surveyed have shifted or are exploring ways to shift a greater percentage of their executive benefits into more secure investment vehicles. Historically, executives have tended to carry a greater amount of risk on their retirement benefits, while employees have had the full amount of their retirement benefits secured, D&T noted.

“More executives will require greater security as part of any employment contract,” Hilko said. “While this approach is state-of-the-art for now, it soon will become standard.”

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