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The demise of guaranteed pensions accelerated on Thursday when IBM announced it would freeze its defined benefit scheme and force all 125,000 of its US employees into a system based on defined contributions.
The change, which will save IBM up to $3bn by 2010, is the latest example of a high-profile employer opting to close its final-salary schemes entirely, as well as shutting them to new employees.
Last month, Verizon, the second-largest US telephone company, froze its traditional plan for 50,000 managers. Rentokil Initial, a UK office services company, became the first large British employer to close its plan to current workforce.
Most companies, particularly younger ones in the technology industry, only offer 401k plans or schemes that pay a pension depending on the value of investments at retirement, but observers believe IBM’s move will hasten the switch from defined-benefit to defined-contribution schemes among older companies too.
Brian Foley, a US compensation consultant, said: “This [latest IBM announcement] is clearly another large, and significant, nail in the coffin for defined benefit pension plans across America.” IBM’s decision is particularly significant because its $48bn defined benefit plan is fully funded.
Ailing companies in steel, coal or the airline industry, by contrast, have been forced to shut schemes due to large deficits.
The company said its move was necessary to maintain competitiveness and has been been migrating international staff away from defined-benefit plans for the past five years. Ninety per cent of its employees, including almost all new staff, already have defined-contribution schemes.
Randy MacDonald, senior vice president human resources, said: “We are one of the few IT companies that have legacy defined benefit plans. This [change] gives us more predictability around our costs and gives employees more job security because we will be more competitive.”
From December 2007, future benefits will no longer accrue for existing defined benefit plans, but the company will sweeten the terms of its 401k plan to encourage acceptance of the new system.
Observers praised IBM for phasing the change in slowly and offering relatively generous contributions to the 401k plan, but pointed out that the size of anticipated savings meant some workers would almost certainly lose out. “If they are going to be saving this much money, then it’s got to be coming out of somebody’s hide,” said Mr Foley. “If IBM are doing this, then other companies will feel that it’s okay for them to do it too.”
Defined-contribution schemes have been criticised for transferring investment risk from companies to individuals, but are increasingly the norm on both sides of the Atlantic.
The number of companies offering defined-benefit schemes in the US has fallen from 112,000 in the mid 1980s to 30,000 today and more than 7.5m employees have seen pensions terminated.