Promises, Promises

New pension rules are supposed to secure employees' retirement. Employers may have other ideas.

When Bemis Corp. saw the
pension liability of its defined-benefit plan
soar in late 2005 as a result of falling interest
rates, the consumer-products packaging
manufacturer decided to limit the accrual of
new benefits to employees who were over 40
and had at least 20 years of service with the
company. Other employees from then on
would be eligible to put pretax savings into a
new 401(k) plan, with Bemis contributing a
share of its annual profits on their behalf.

The expectation is that the so-called
soft freeze of its defined-benefit plan will
halve the company’s annual pension expense
after eight years. In the months since the
passage of the Pension Protection Act of
2006 in August, other companies have
announced similar actions. DuPont, for
example, plans to reduce the benefits in its
pension plan for existing employees and
close it to new ones as of January 1, 2008,
cutting its costs by roughly two-thirds. Tenneco
and Blount International plan similar
changes and expect to save $11 million and
up to $23 million annually, respectively.

Spurring this trend is a recent move by
the Financial Accounting Standards
Board, which issued the first of two sets of
rules to require corporate plan sponsors to
take pension assets and liabilities out of
their financial-statement footnotes and
include them in their reported results (see
“Mismatched from the Start” at the end of this article). Taken together, the
new rules enacted by Congress and FASB
“will make the true cost of defined-benefit
plans transparent to investors and accelerate
the closing of defined-benefit plans by
financially healthy plan sponsors,” predicts
Zvi Bodie, a professor of finance and economics
at Boston University.

Indeed, that transparency may just nail
the coffin shut on traditional pensions.
According to Bodie, the combination of
stiff new funding requirements for traditional
plans and higher premiums on government
pension insurance creates further
disincentive for offering traditional
benefits. And while the law is designed to
improve the chances that companies will
make good on existing pension promises,
it may also encourage them to freeze or at
least limit those promises and shift investment
risk to employees through 401(k)s
and other defined-contribution arrangements —
as firms like Bemis have done. Basically, says Bemis’s treasurer, Melanie
Miller, “the law allows companies to do
what they’ve wanted to do for some time.”

No Real Obligation

It’s no secret that defined-benefit plans
have been losing favor among corporate
plan sponsors. The percentage of full-time
employees of large and midsize companies
who take part in defined-benefit
plans fell from 80 percent in 1985 to 33
percent at the end of 2003, while those in
defined-contribution plans climbed from
41 percent to 51 percent. What’s different
now is that that shift has been further
propelled by new legislation.

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