Motorola follows trend in limiting its pension plan

CHICAGO — There are two kinds of employees working side by side in big companies:

• Those hired in a paternalistic era when pensions were common, who will get retirement payments for life.

• Those who signed on after such rich benefits disappeared, who will retire on what they can save and invest, with a little help in the form of matching contributions from their employers.

In truth, not even the veterans' pensions are immune from corporate cost-cutting. Often a company's decision to close its pension to newcomers is a prelude to trimming retirement benefits for other active employees, pension experts said.

A case in point is Motorola.

The cellphone maker based in Schaumburg, Ill., decided two years ago to close its plan to new hires, effective January 2006.

Effective next January, Motorola will change the way it calculates benefits for employees who were in the plan before it closed, resulting in smaller payouts for 24,000 active workers. Retirees are unaffected.

"It's a variation [on pension freezes] but the theme is still the same: Less is being provided through defined-benefit plans," said Dallas Salisbury, president and chief executive of Employee Benefit Research Institute, a Washington, D.C.-based nonprofit.

Motorola said its decision, reported last month in a securities filing, comes at a time when many of its competitors have eliminated defined-benefit pensions. Hewlett-Packard is among the most recent examples.

"In our benchmark group, there's very few that have pensions left," said Motorola's director of global rewards, Randy Boldt. "We thought this was a better route so employees still have a pension plan. The alternative was to freeze like everyone else."

A total freeze means benefits stop accruing, leaving employees with the pension they earned up until the freeze. IBM, Coca-Cola Bottling and Circuit City are among the employers that chose this route in recent years.

Aon and Lockheed Martin, like Motorola, are among those that closed plans to new entrants but allowed benefits to accrue for other employees.

Traditional pension plans cover an increasingly smaller slice of the private work force, though about one-third of Fortune 100 companies still offer them to new employees, according to consultant Watson Wyatt Worldwide.

Less than 18 percent of private-sector workers are covered by defined-benefit pensions, down from 35 percent in 1980, according to the Employee Benefit Research Institute.

Companies freeze plans to avoid the cost and risk of investing pension money. Stricter accounting rules require them to report the market value of their pension funds on their financial statements.

The swings in the funds' value when the stock market dives or interest rates fall makes their results more volatile.

Pension experts said it is not uncommon after a company freezes a plan to new hires to later reduce benefits for active participants.

"When you see these freezes, it's quite likely that the long-term strategy is to change benefits for those that are grandfathered," said Jerry Levy, a Mercer Human Resource Consulting worldwide partner in Chicago.

Motorola averages the five highest years of earnings during an employee's last 10 years. The new formula will start by averaging the highest in any five of the last 10 years ending in December 2007, then averaging in the remaining years worked.

"We tried to come up with a unique solution that would allow employees to keep accruing benefits and also satisfy the pressure the market puts on us to control costs," a Motorola spokesman said.