Pensions going by wayside despite new law

WASHINGTON — When DuPont announced plans last week to scale back its traditional pension, it became the third large employer to cut back on retirement benefits since Congress passed the Pension Protection Act of 2006.

The changes were brewing long before Congress passed the bill Aug. 3. But the flurry of cuts reflect a larger reality: The system of traditional pensions is in hasty retreat, and little in the new law is likely to stop the trend.

"I think this is the tip of the iceberg. You'll probably see a lot of companies freeze their plans in 2007," said Lynn Dudley, vice president of retirement policy for the American Benefits Council, an advocacy group whose members include large corporations.

Although the 907-page bill was touted as an effort to stabilize the pension system, Dudley maintained that aspects of the law, along with impending regulatory changes, only will hasten the demise of old-style pensions that guaranteed steady income for life.

"Certainly, nothing in this legislation served as an incentive for anyone to keep their plans," she said. "The American people should know this is a real missed opportunity."

Delaware-based DuPont, known for generous employee benefits, said its traditional pension will be off limits to new workers starting next year. In 2008, the company will change its pension formula for current employees, lessening their payouts in retirement.

The move followed pension freezes by Tenneco, an auto-parts maker in Illinois, and Blount International of Portland, which makes outdoor equipment. All the companies said they would make improvements to their employees' 401(k) savings plans.

The cutbacks are just the latest in a series by U.S. corporations that are phasing out costly traditional pensions in favor of 401(k) accounts and similar plans that provide workers with retirement nest-eggs but don't guarantee a monthly check for life.

Separately, bankruptcies by major companies such as United Airlines have put pressure on the federally chartered company that picks up pension obligations when employers go belly up.

The Pension Protection Act was designed to address both issues, as well as close loopholes that gave corporations substantial leeway in meeting pension funding obligations.

Under the new law, companies are expected to fund 100 percent of their pension commitments, up from 90 percent.

To shore up the safety net for workers, the law encourages employers to strengthen their 401(k) plans and also clarifies legal issues to make it easier for companies to convert their pensions into "cash balance" plans, which are similar to 401(k)s but retain some of the benefits of traditional pensions.

Critics, however, say the stricter funding rules may backfire by encouraging companies to freeze their plans rather than endure the burdens of compliance.

On top of that, tougher pension accounting rules are scheduled to take effect at the end of this year. The Financial Accounting Standards Board will require companies to include pension funding obligations in their balance sheet, potentially reducing a company's net worth.

"What these changes do is underline the costs that a company has to accept when they sponsor a [traditional] defined-benefit plan," said Charles Ruffel, chief executive of Plansponsor, a trade publisher for the benefits industry.

Of the latest government efforts, he added: "In order to save defined-benefit plans, they have accelerated their demise."

Companies that reduce their pension commitments often improve their 401(k) savings plans, typically by kicking in more money.

Workers are allowed to take such accounts with them if they change employers, unlike the old-style pensions where workers who job-hop frequently might not be with one company long enough to ever qualify for a pension.

"A lot of people aren't sure they're going to spend their whole careers with one company, and they like the idea of a benefit that they can transport to another company," said DuPont spokeswoman Lori Captain. "The market is changing. There are clear trends moving in this direction."

Still, some worry that workers will be hurt by the changes. Many workers fail to enroll in 401(k) plans. For those who do, savings can be undermined by poor investments. Decisions to withdraw the money can hammer account values. Older and less sought-after workers may not be able to take advantage of their mobility.

"What this does is put another big burden on the employees," said Jim Flickinger, president of the International Brotherhood of DuPont Workers.

The company's enhanced 401(k) plan, he said, holds more allure for career managers who move from one corporation to another than for factory workers who expect to stay put and have planned on a predictable retirement income.

"The manufacturing people are the ones who have to take the hit," Flickinger said.

All agree that the latest corporate cutbacks reflect a world view in which traditional pensions — once seen as a way to lock in a loyal and able workforce — increasingly are viewed as costly weights on a company's competitiveness.

DuPont noted its pension-plan changes would boost earnings by 3 cents a share next year and 5 cents a share in 2008. Blount predicted savings of $16 million to $23 million over the next five years.

Tenneco, which makes shock absorbers, tail pipes and other auto parts, said its pension changes will save $11 million a year before taxes.

"We operate in a very tough environment, a very competitive environment," said Jane Ostrander, spokeswoman for the company in Lake Forest, Ill. "This is one piece of that ongoing effort to get our arms around these costs."