US defined-benefit pension plans cause cost concerns

Expense and funding volatility are the No. 1 concern of nearly three-quarters of large US employers with defined-benefit pension plans. At a time when the debate over pension reform is focused on changes that will reduce employers’ ability to smooth cost changes — thereby increasing volatility — they are feeling pressures for sustaining employee pension plans.

“Virtually everyone who is proposing changes to pension rules is suggesting changes that will increase cost volatility,” says Steve Metz, principal in PricewaterhouseCoopers’ human resource services group. “So, if volatility is a major factor driving employers away from pension plans and the rules are changed to increase it, well, you do the math.”

Most companies (67%) that have made a change in their plan over the past three years, or are contemplating one, have considered freezing it or closing it to new hires.

“About seven out of 10 large US multinationals polled that are considering making changes to their plan are considering terminating it or freezing all benefit accruals,” says Metz.

An unsettled climate
Companies that have recently changed their plan or are considering a change have been motivated primarily by the following reasons:

Increased costs 85%
Volatility of funding or expense 64%
Accounting requirements 30%
Competitors’ actions 18%
Government regulations 18%
Employee acceptance 9%
Other reasons (volunteered) 3%

Three in four companies that made changes protected current employees. Fifty-nine percent adjusted benefits only for future hires, and 48% grandfathered in certain employees based on age or service. A few (15%) provided additional “transition” benefits, and 11% gave all employees a choice between the old and revised plans.

“Employers have expressed concern that lack of pension benefits for new hires may ‘lock-in’ some employees at their current job,” said Metz. “As a result, employees in certain age and service categories may find that giving up their pension makes it too expensive to switch jobs.”