Motorola Solutions Inc. and Bristol-Myers
Squibb Co. are the latest companies to cast off billions in pension
burdens, fueling a trend that could weaken the government’s ability to protect
the payouts other employers have promised millions of retired workers.
The two companies recently disclosed separate deals that
will shift a combined $4.5 billion in pension obligations to insurer Prudential
Financial Inc., which will take over paying benefits to 38,000
retirees. The deals are good for the two companies’ balance sheets. What’s
more, joining the dozens of companies that have shed their pension plans lets
Motorola and Bristol-Myers stop paying millions in yearly fees to the Pension
Benefit Guaranty Corp., the government pension insurer.
The problem: the growing number of these pension dropouts
threatens the agency’s resources for insuring the plans of those that remain in
the system.
Last year alone, the agency, whose single-employer program
is running a deficit of more than $27 billion, shelled out $5.5 billion to
900,000 retirees whose plans had gone bust. In December, in a move to shore up
the system, Congress raised the mandatory insurance fees companies must pay. The
cost for each employee covered by a private pension will rise to $64 by 2016
from $49 this year.
At those rates, Motorola would save over $5 million in total
premium payments through 2016, while Bristol-Myers would save almost $1.5
million.
One of the loudest corporate gripes is that all companies
pay the same fees, regardless of their financial health. That means strong
companies subsidize the weak, though companies with deeply underfunded pensions
also pay yearly penalties. To be sure, removing pension plans from the PBGC’s
jurisdiction also reduces the agency’s potential obligations, but the net
impact is uncertain.
Millions of American workers and retirees are covered by
defined-benefit pension plans—those that promise set benefits. But their
numbers are shrinking rapidly.
Only 14% of the nation’s private-sector workers were covered
by defined-benefit plans in 2011, the most recent data available, less than
half the 38% in 1979, says the Employment Benefit Research Institute. Though
many companies are reducing their exposure, others still believe pensions are
an important perk.
The latest transfer deals were the largest in the U.S. since
2012, when General Motors Co. and Verizon Communications Inc. shifted
billions in pension exposure to Prudential. The GM deal covered 110,000
white-collar retirees and the Verizon transaction 41,000 workers. Transferring
pensions to insurers not only reduces companies’ administrative costs but also
protects them from the violent swings in the value of pension obligations.
The funded status of the 100 largest company pensions
combined plunged to a record deficit of almost $392 billion at the end of 2012
from a surplus of nearly $68 billion at the end of 2007. At the end of August,
the gap had shrunk to $281 billion, according to actuarial consulting firm
Milliman Inc.
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