Firms may start freezing pensions

By Christine Dugas
USA Today

A resurgent stock market has failed to reduce pension shortfalls, prompting more than a third of U.S. companies with a pension plan to say they'll freeze benefits.

If Congress and regulators do not provide relief, 21 percent of employers say they will freeze benefits at current levels, according to a survey of more than 200 large companies by consulting firm Hewitt Associates. And 17 percent say they will halt benefits to new employees.

The percentage of employers offering traditional pensions dropped to 45 percent in 2003 — from 83 percent in 1990 — as they switched to other pension types and 401(k) plans, Hewitt says. Between January 2001 and October 2003 alone, 13 percent of more than 1,000 plans reviewed by Aon Consulting had frozen benefits.

Companies are considering pension cutbacks despite big market gains last year, which boosted pension plan assets at companies in the S&P 500 by $112 billion, according to Standard & Poor's projections. That's because the amount of benefits they estimate they'll owe retirees has grown faster than assets.

As a result, the amount that pensions in the S&P 500 are underfunded grew to about $259 billion last year, from $212 billion a year earlier, Standard & Poor's says.

Companies complain that benefit obligations are artificially high because they are required to base calculations on the 30-year Treasury bond, which is no longer issued. Though interest rates are generally low, the rate used for the 30-year Treasury bond is lower than corporate bond rates. Low rates cause estimates of future pension obligations to soar.

Congress had been near an agreement on a pension relief bill, but adjourned without passing it.

The bond market has taken some pressure off pensions, says Howard Silverblatt at Standard & Poor's. Rates on the 30-year Treasury bond bottomed in June at 4.14 percent, vs. 5.18 percent now, he says. The shortfalls are primarily a concern for investors because the money to fund pensions often cuts into capital expenditures, Silverblatt says. Most companies have sufficient funds to meet their pension obligations, he says.