Pension Crisis Prompting Changes to Company Retirement Plans

More than half (52 percent) of 125 companies polled are considering changes or already have made changes to their pension plans in the past year, according to a survey by Deloitte Consulting LLP.

Buffeted by increased costs due to falling interest rates and investment returns and by continued pressure from financial analysts to limit future risk, more companies are opting to move away from defined benefit plans. Among those respondents that have changed their plans, the single most common shift (among 38 percent) was freezing their pension plan and moving to a defined contribution plan. Two-thirds of respondents that made plan changes cited cost savings as the primary driver, with 63 percent also seeking to reduce cost volatility.

"The pain is increasing rather than diminishing when it comes to defined benefit plans," says Brian Augustian, the Chicago-based Deloitte Consulting LLP principal who oversaw the survey. "One year of strong investment returns has not bailed out companies from their huge unfunded pension liabilities. Add to that the ruling from one federal court that found cash-balance plans to be age-discriminatory and the possibility of that specific company facing retroactive damages of $6 billion or more, it’s no wonder that 58 percent of respondents indicated their pension plans are a more significant business issue now than a year ago."

Only 14 percent of respondents offering cash balance plans now intend to make changes to their retirement programs. But if court rulings make it impossible for them to maintain their cash balance plans, 52 percent have already determined they would switch to defined contribution plans.

More tellingly, if respondents had the opportunity to create a retirement program from scratch, only 10 percent would offer annuity-based pension plans and 21 percent would offer account balance pension plans (either cash balance or pension equity plans—assuming age-discrimination issues can be resolved). “The risks for defined benefit plans continue to grow, pushing more and more companies to defined contribution plans,” notes Michael Fucci, U.S. managing director of Deloitte Consulting LLP’s Human Capital practice. “As a result, the burden is increasingly shifting to individuals to manage their retirement income.”

About the Survey

Deloitte surveyed senior human resources executives from 125 companies with median revenues of $1 billion and an average of 4,000 employees. Respondents represented all industries, with 36 percent in manufacturing and 12 percent in financial services.

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