Of the plan sponsors at a panel discussion hosted this week by PLANSPONSOR and underwritten by SEI, half said their companies were taking a wait-and-see approach, putting off any changes until the legislation passed. The other half said they were already making changes. And nearly 75 percent see the pending legislation as the linchpin to more frozen pension plans.
Stuart Shears, vice president and treasurer at Hercules, Inc., and one of the panelists at Getting Ahead of the Pension Reform Curve: What Decisions Can Financial Executives Make Now To Help Control the Impact?, said his company started bracing for the reform about four or five years ago, pouring about $45 million each year into the accounts to make sure they were fully funded.
“Our thought was that it is a liability and we’re going to have to pay it off sooner or later,” Shears explained. “At the end of the day, debt is debt.” Still, the efforts to bolster pension accounts with even diligent cash contributions were, for Hercules, Inc., futile at best. Along the way, Shears said the “discount rate dropped and we are no better funded today then we were five years ago.”
Still, the other half of the participants decided to defer making any major changes to pension plans until April, when the details of the reform are expected to be clearer.
The participants were somewhat more split on what types of reform would have the most impact on their balance sheets, naming reduced smoothing as their primary concern, followed closely by credit balance elimination or restriction.
The Trend Toward Freezing
Participants in a second panel at the event focused on what appears to be an accelerating trend toward freezing existing pension plans, and the recent actions at such high-profile companies as IBM and Northwest has caused others to wonder if they should do the same. However, even if freezing plans frees up some money in the short run, it remains unclear if doing so will be a quick fix or a long-term solution.
While more than half of the roughly 20 plan sponsors in attendance said their plans were active and open to new participants, nearly a third said their plans were already closed to new entrants. Participants were basically split three ways when it came to future predictions on how their companies would deal with pension plans in the future, with about one-third foreseeing no change, a third only closing the plan to new participants, and the other third freezing benefit accruals.
Panelist Michael Fortini, vice president of finance at New Jersey-based Pearson, Inc., said an acquisition that doubled the size of the work force at his company from about 4,000 to 8,000 employees lead to the decision to freeze accounts. “We didn’t want to have two classes of employees,” Fortini said.
Still some plan sponsors see freezing pension accounts as simply halting a liability, neglecting the asset side of the equation, warns Jim Morris, senior vice president, SEI Global Institutional Group. “Some plans are in worse shape after freezing them, than when they have money put into them,” he said.
Twenty percent of the participants said that freezing plans would most impact administrative responsibilities; 19 percent were most concerned about communication with participants; about 14 percent predicted the changes in actuarial roles to be the most dramatic as a result of freezing, and 14 percent said investment management.
Fortini also recounted the disconnect between human resources and the financial side when his company made the decision to freeze its accounts, describing the dynamic between the two departments as a sort of critical minuet. He said that even though his company teamed up with Mercer to market the program to employees, the human resources department continued to send employees paperwork for the old plan. He said most of the employees simply did not notice they were getting the wrong information. But some did. He warned those attending the panel that if human resources and financial officers do not work together, “you might have to pay people off, like we did,” referring to the difference paid to employees between what they thought they were getting and what actually did get.
While the panelists did not urge the participants of discussion toward any clear conclusion on the freezing of pension funds, they pointed to some of the perils of seeing it as a risk-free option.
– Adrien M. Martin