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Is Pension Crisis a Scapegoat?
By THEO FRANCIS and ELLEN E. SCHULTZ
Staff Reporters of THE WALL STREET JOURNAL
Companies across the country have been taking an ax to their pensions , citing rising costs and the declining health of their pension plans. This year, some, like investment bank Morgan Stanley and benefits-consulting firm Watson Wyatt & Co., have cut pension benefits, while a few, including US Airways Group Inc., have killed pension plans altogether.
Employers eager to cut pensions blame the "perfect storm" of falling stock prices and low interest rates. That confluence caused corporate pension plans to go from being 23% overfunded at the end of 2000 to 19% underfunded at the end of last year, according to Bear Stearns & Co.
But some employees say their pension plans aren't as sick or costly as their employers claim, and argue that the companies are just using temporary market conditions as a pretext to cut benefits.
Indeed, the storm may be passing more quickly than realized. This year, billions of dollars in investment losses have vanished, thanks to a recovering stock market. And interest rates have moved higher, diminishing the pension obligations companies must record. The Dow Jones Industrial Average is up 16% year to date and the yield on the 30-year Treasury bond, a key pension benchmark, is 5.05%, up from 4.78% on Dec. 31.
"The two biggest tides have risen and should be lifting the boats," says Jack Ciesielski, a pension-accounting expert who writes the Analyst's Accounting Observer newsletter for investors. Moreover, a repeat of the "perfect storm" is unlikely -- interest rates and the stock market have fallen in tandem only twice in the past 20 years, during 2001 and 2002.
Bear Stearns, in a report released last week, said pension plans are now on a "path to recovery." The report predicts that by the end of 2004, pension underfunding for the 100 companies with the biggest benefit obligations in the Standard & Poor's 500-stock index will drop to 2%, from 12% at the end of this year.
Even though pension problems appear to be ebbing, companies continue efforts to reduce or kill pension programs.
This summer, Morgan Stanley changed to a less-generous way of calculating pension benefits. Instead of a formula that is based on an employee's highest pay, it will instead use a "career average" formula based on a staffer's average pay over all years on the job. Morgan Stanley handouts made it clear that "most will accrue less in future pension benefits as a result."
Securities filings show that Morgan Stanley's pension accounting expense -- which represents the pension plan's impact on corporate income -- rose to $121 million in fiscal 2002 from $68 million the year before.
However, the filings also show that much of that increase was a one-time cost related to terminating a pension plan, and most of the remaining costs stemmed from accounting changes. Like most companies, Morgan Stanley lowered the discount rate it uses to calculate pension liabilities, and lowered its assumption for what the pension assets would earn.
Most companies have made similar adjustments when estimating their pension obligations, which have sent their pension liabilities and expense soaring. (Such recalculations don't mean that companies have to pay more money to retirees or, in many cases, even contribute more money to their pension plans.)
A Morgan Stanley spokeswoman doesn't dispute this information but adds that, despite the cuts, the company's new pension plan is "highly competitive."
Similarly, Watson Wyatt, a big pension and benefits-consulting firm based in Bethesda, Md., told its employees this summer that it would stop contributing to 401(k) plans, and instead use the money "to offset the increased cost of the pension plan and to help fund [fiscal 2004] bonuses." The company also cut pensions .
Filings show that while Watson Wyatt's annual pension accounting expense -- a noncash cost -- did jump in 2002, the increase was largely the result of cuts in the discount rate and declining investment returns in recent years, which are amortized into the income statement over time.
Eric Lofgren, global director of the company's benefits-consulting group, says that the elimination of the 401(k) match was a temporary change in response to temporary setbacks in the pension plan. In contrast, the cut in pension benefits, which he called small, was primarily a retention tool, he says. With slower pension buildups, older workers need to work longer, he says, so the moves were motivated "primarily due to our desire to keep people longer" at the company.
Some experts, such as Mr. Ciesielski, wonder if some employers are using the so-called pension crisis as an excuse to cut pensions in order to save money rather than because of any market-driven problems.
That's what retired US Airways pilots allege. Earlier this year, US Airways, based in Arlington, Va., terminated the pilots' pension plan, saying it was so underfunded that the burden of contributing money to it would prevent the company from emerging from bankruptcy.
The retired pilots, who unsuccessfully sued to stop the termination, said the company was exaggerating its pension problem simply to dump a liability. They are now receiving reduced pensions , paid by the Pension Benefit Guaranty Corp., a quasipublic pension insurer that took over the plan.
Now, the airline is saying that the pension plan wasn't so underfunded after all. It's back in U.S. Bankruptcy Court in Alexandria, Va., arguing the pension liability is actually only about $900 million, not the $2.5 billion estimate publicized last spring. A lower liability means that the PBGC would be entitled to less of US Airways' assets.
"Shame on them," says Tom Davis, spokesman for the Retired Pilots Association of US Airways. "Their first objective was to terminate the pension , so evidence was presented to support that. Now their objective is to keep the PBGC from getting money, so they're saying the plan isn't so underfunded after all."
Chris Chiames, a spokesman for US Airways, says the company terminated the pension to keep the airline from being liquidated and not simply to save money, and adds that the company always disagreed with the underfunding estimates. "The request to terminate the plan was carefully scrutinized and met with rigorous tests," he says. "The actuarial estimates were reviewed by the bankruptcy court, the PBGC, and its own independent actuaries as well. In addition, multiple government agencies were all involved in the decision."
Although most companies don't go so far as to terminate their pension plans, employees and retirees still have a hard time evaluating claims that their pension plans are an undue burden on their employers.
That may be changing. In August, the American Bar Association's leadership announced that it would be cutting the pension plan for 900 staffers, citing stock declines and low interest rates, even though both trends had reversed themselves this year. But 400 skeptical ABA staffers passed the hat and collected more than $10,000 to hire legal counsel and an actuary to go over the pension plan in detail.
The actuary, Kathleen E. Manning of MWM Consulting Group in Chicago, found that the pension plan was well funded, and, in a report presented to the association in August, noted that the liability -- and future costs -- of the pension looked unreasonably high because the association's projections assumed that interest rates and investment returns would remain seriously depressed.
She added that a likely rise in interest rates and the stock market's continuing recovery could solve much of the ABA's potential pension problem.
Laurel Bellows, chairwoman of the ABA's pension review committee, agrees that much of the staff-arranged actuarial report is "sound," though she maintains that the ABA's own analysis concluded that keeping the pension plan would cost more than ABA leaders had said the organization could afford to spend in coming years.
Some of the staff members' strongest supporters are attorneys who belong to the ABA -- including lawyers who design and analyze pension plans -- and who don't even benefit from the pension plan. Several questioned whether the ABA was exaggerating the pension's potential costs to make up for cost overruns in an information-technology overhaul. Ms. Bellows said the cost overruns are unrelated to the pension issue. "This is an economically driven discussion," she says.
Write to Theo Francis at theo.francis@wsj.com and Ellen E. Schultz at ellen.schultz@wsj.com
Updated November 18, 2003
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