http://www.ajc.com/services/content/printedition/2009/07/05/pension0705.html

Traditional pensions all but retired
Financial crisis forces firms to freeze plans.Workers who turn to 401(k)s see
matching contributions cut.

By Russell Grantham

The Atlanta Journal-Constitution

Sunday, July 05, 2009

Joining a nationwide trend, a majority of Atlanta's 12 largest publicly traded
companies are freezing traditional pension plans for tens of thousands of
employees, replacing them with 401(k)s or switching to other retirement plans
that are generally cheaper.

For many of the companies, which include Coca-Cola, Delta Air Lines and SunTrust
Banks, the recession and financial crisis have been a major factor in the move.
They have seen the total value of their pension plans slashed by the economic
downturn, leaving them underfunded by billions of dollars that must be made up
over the next several years.

But also driving the change, experts say, is a desire by younger, more mobile
workers to build a retirement fund piecemeal as they move more frequently from
employer to employer.

As a result, more metro Atlanta workers are joining the ranks of Americans
shouldering primary responsibility for saving and investing enough money to fund
their retirements. Only 17 percent of private-sector workers nationwide are now
covered by traditional pensions in which a company promises its retirees a
predictable retirement income no matter what happens in the financial markets.

"It's those people in their 40s and 50s that are going to get caught. They need
to start saving and investing," said Thomas Stone, a former Delta executive who
retired before the company froze its pension plan in 2004.

Stone, 64, says his own children don't expect to retire on a traditional pension
like his. "It no longer makes sense for a company to take on that kind of
obligation."

Says Diane Garnick, a New York investment strategist for Atlanta-based money
manager Invesco: "I call the generation that's going to work today the `yo-yo
generation,' because `you're on your own.' "

In fact, even as companies continue to abandon traditional pensions for
alternatives like 401(k)s, a new survey by securities broker Charles Schwab
shows that nearly a quarter of U.S. companies have suspended matching
contributions or are considering doing so.

"That's what we call the slippery slope," said Nancy Hwa, spokeswoman for the
Pension Rights Center, a nonprofit advocacy group in Washington, D.C. Companies
partially freeze their pension plans and convert to a cheaper pension plan or
401(k) plan, then later freeze that pension plan or suspend 401(k) contributions
as well, she said.

"It's kind of a race to the bottom, which is unfortunate."

So few employees now have traditional pensions, said Dallas Salisbury, president
of the Employee Benefits Research Institute in Washington, D.C., that "if you go
down the street, most of the people you run into are not affected" by freezes or
other pension changes.

Of two dozen people interviewed during a recent lunch hour in downtown Atlanta,
only a handful worked at companies with pension plans, and those were already
frozen. Several said they were more worried about the impact of the past year's
plunge in stock prices on their 401(k) plans.

Earned benefits kept

Of the dozen Atlanta firms that are members of Standard & Poor's 500 index,
seven have frozen or plan to freeze their traditional pension plans or convert
to cheaper versions, including Coca-Cola, Delta, SunTrust, Equifax and Newell
Rubbermaid. One of the dozen, Home Depot, doesn't offer traditional pensions.
The freezes or conversions probably affect most of the companies' more than
140,000 U.S. employees, though senior employees at some companies are exempted.

Other companies and organizations with metro Atlanta ties that also have frozen
pensions recently include Russell Corp., Wells Fargo, NCR Corp. and the Atlanta
Convention and Visitors Bureau. The latter two also have suspended contributions
to employees' 401(k) plans, as have UPS and Zep Inc., although Zep, citing signs
of economic improvement, said last week it's phasing them back in.

Pension freezes by big companies are significant because they have been among
the last employers to abandon the traditional retirement benefits that most
large firms once offered.

In the 1980s, virtually all Fortune 100 companies offered traditional "defined
benefit" pensions that promised retirees a fixed income for life. Likewise, the
number of traditional pension plans run by a single employer has dropped from
92,000 in 1990 to 29,000 now, according to the report earlier this year by the
federal Government Accountability Office.

When a company freezes a pension plan, it continues to honor whatever benefits
its employees have earned up to a certain date. Some companies do only partial
freezes, such as barring new employees from existing plans. Others freeze
employees' credit for future years of work but still adjust pensions for salary
growth. Freezes don't affect the already vested benefits of retirees or former
employees.

One local company that has not frozen its pensions is UPS. Company officials
said the package-delivery giant is in good shape to continue its pension plans
because it had a $4.4 billion surplus in the plans before the financial crisis
and recession. The company expects to pump $778 million this year into its
plans, which cover more than 400,000 employees.

"We haven't seen any reason" to curtail UPS's pension benefits, said spokesman
Norman Black.

Obligation exceeds assets

The financial crisis and changes in federal regulations have helped spur pension
changes at many companies.

Investment losses on pension funds at UPS, Delta, Coca-Cola and eight of the
metro area's other S&P 500 companies topped $11.5 billion last year. As a group,
those companies' pension plans are underfunded by almost $16.5 billion, meaning
the estimated value of their pension obligations exceeds their assets by that
amount.

For instance, Coca-Cola's pension plans worldwide lost $961 million last year,
lopping nearly a third of the value of the company's pension portfolios. Delta's
pension deficit ballooned to more than $8.6 billion last year after it took over
Northwest Airlines' underfunded pensions and also lost more than $1 billion on
the combined pension plans.

While experts and company officials say such whopping numbers don't mean those
pension plans are near collapse, the big deficits do put more financial pressure
on the companies.

For many companies, said Kevin Wagner, retirement practice director at
consulting firm Watson Wyatt's Atlanta office, replacing traditional pensions is
a "long-term fix" aimed at stabilizing their bottom lines.

Flexible plans new trend

The current financial fallout has shaken many of the pillars of the social
contract between companies and employees, Wagner said.

"You can see medical benefits are under attack right now. Retirement benefits
are under attack right now," said Wagner. "We are in a real state of change and
so much of it is going to be fundamentally decided by the economy."

He said that over the past few years, Atlanta has been a hotbed for conversions
to so-called "cash-balance" plans, which still promise a defined benefit but cap
companies' long-term pension risk. Companies typically contribute about 4
percent of a worker's salary annually to an account that grows at a variable
interest rate. If employees quit before retirement, they can take the lump sum
with them.

"It is a more equitable distribution" for many employees that don't expect to
stay at one company long-term, said Wagner. "As you go from employer to employer
to employer, there's more of a steady build-up" of retirement savings.

Added Garnick, many younger employees are willing to trade the long-term
security of a more costly traditional pension for the short-term possibility of
a higher salary and more flexible pension plan.

In Atlanta, Delta, Newell-Rubbermaid and Equifax, have boosted contributions to
defined contribution plans such as 401(k)s. Coca-Cola and SunTrust are among
companies replacing their traditional pensions with cash-balance plans.

Coca-Cola and SunTrust say the moves aren't pension freezes since they're
switching to cash-balance plans, which are also defined-benefit plans. However,
in filings with the Securities Exchange Commission, both companies disclose that
they have frozen or are freezing portions of their older pension plans.
Coca-Cola said the change reduced its pension obligation by $21 million.

In either case, said Hwa of the Pension Rights Center, the moves usually leave
employees with smaller retirement nest eggs and facing more risk when the market
crashes.

"We see it as mainly a cost-cutting measure for the companies," she said. "When
people have only a 401(k) and see that decline 40 or 50 percent, it's very
difficult for an older worker to get that back."

Conversions to cash-balance plans have stirred controversy. They are usually
less favorable to longtime employees than traditional plans, since retirees get
a lump sum rather than a pension check for life. It's left up to them to make
sure the lump sum lasts.

A federal court temporarily shut down conversions to cash-balance plans when it
ruled in 2003 in favor of IBM employees who alleged the plans discriminated
against older workers. But an appeals court overturned the ruling and Congress
passed the Pension Preservation Act, which clarified how companies could avoid
the discrimination issue when switching to cash-balance plans.

Cover Story | Retirement plans

Retirement plans

The pension landscape has changed radically since the 1980s, when more than 80
percent of private-sector employees' retirement plans were traditional "defined
benefit" pensions. Now more than 60 percent have only 401(k) plans that allow
tax-sheltered retirement savings. Many companies have converted their
traditional pensions to cash-balance plans that limit their financial risks.

Traditional pension: Funded solely by the employer, it is calculated based on a
formula using base compensation and number of years of service, with longer-term
employees earning a larger benefit. Usually employees must work a minimum number
of years to be eligible.

401(k) plan: In such plans, companies usually match a portion of employees'
voluntary contributions to an account in which the individual worker makes the
investment choices rather than the employer. Companies sometimes automatically
contribute to these plans after freezing their traditional pension plans.

Cash-balance plan: These promise a pension benefit in the form of a lump sum
rather than a fixed income. Typically companies contribute about 4 percent of a
worker's salary annually to an account that grows at a variable interest rate.
Employees who leave can take the lump sum with them.

Companies' changes to their retirement plans are disclosed in footnotes in their
annual 10-k filings to the U.S. Securities and Exchange Commission: www.sec.gov.

The Pension Rights Center publishes a list of companies that have frozen
pensions or suspended 401(k) matching contributions: www.pensionrights.org

The Employee Benefits Research Institute has extensive information on pension
trends: www.ebri.org.