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IBM TO FREEZE PENSION FOR 125,000 WORKERS
IBM to Freeze Pensions, Enhance 401(k)s
BOSTON
(Jan. 06) – Furthering corporate America’s move away from pensions,
International Business Machines Corp. said Thursday it will freeze its
$48 billion pension plan in 2008 and instead enhance its 401(k)
benefits for its 125,000 U.S. workers.
Nearly all IBM’s U.S.
employees – everyone hired before Jan. 1, 2005 – have pension benefits
accruing under a traditional annuity-like plan or a cash-balance plan,
which gives workers interest-bearing funds that they can take with them
if they leave the company.
But these “defined-benefit” plans are
becoming rarer. Companies say the plans carry too many uncertainties,
largely because swings in interest rates and investment performances
change accounting considerations and the amounts businesses must
contribute to their pension funds in a given year.
Industrial giants
such as IBM and airlines that still carry pension obligations say the
costs and complexities hamper their ability to compete with younger,
more nimble rivals that aren’t saddled with pension obligations.
Beginning
in 2008, then, IBM workers’ pension benefits will be locked in place,
based on salary and length of service. The accrual of benefits will
stop, meaning future raises or additional years with the company will
not signify bigger pension checks upon retirement.
Instead, IBM will
increase its contribution to its 401(k) plans, in which workers get a
defined, predictable amount from the company that they’re responsible
for investing. IBM will double the percentage of employees’
contributions that it matches, to 6 percent of salary; certain
employees will be eligible to receive more.
Current retirees will see no changes.
IBM
executives said that by no longer having to account for pension
accruals that would have mounted after 2008, the Armonk, N.Y.-based
technology giant will save between $450 million and $500 million this
year alone and up to $3 billion from 2006 through 2010.
However, the change will result in a $270 million charge in the just-completed fourth quarter of 2005.
The
action mirrors steps IBM has already taken in other countries, and
follows IBM’s decision to offer 401(k) plans only – no pensions – to
workers hired after Jan. 1, 2005. Similarly, rival Hewlett-Packard Co.
decided last year to offer only a 401(k) plan to U.S. workers hired
this year and beyond.
Patrick Kendall, a pension expert at
Diversified Investment Advisors, a consulting firm specializing in
retirement plans, said the “hard freeze” IBM announced Thursday was
almost inevitable considering the company’s earlier “soft freeze” of
closing the plan to new employees.
“I think a lot of these sponsors
would like to get out of (defined-benefit plans) entirely, just
terminate the plan,” he said. But many companies find that termination
fees and other complications negate that strategy, he said.
Pensions
have been a touchy subject for IBM, which was hit with a federal
lawsuit – settled for up to $1.4 billion – filed by employees who
contended that IBM committed age discrimination when it shifted to a
cash-balance plan.
Randy MacDonald, IBM’s head of human resources, said the decision was unrelated to the lawsuit.
“It’s all about cost-competitiveness, so that we could continue to be the financially viable company that we are,” he said.
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