January 02, 2006
Monday AM

When Verizon Communications announced this month that it would freeze pension and retiree medical benefits for about 50,000 management employees, Chairman and Chief Executive Officer Ivan Seidenberg raised retirement insecurities of workers everywhere.

"This restructuring reflects the realities of our changing world," Seidenberg said. "Companies today, including many we compete with, are not adopting defined benefit pension plans or subsidized retiree medical benefits."

In 2004, 11 percent of Fortune 1,000 companies had frozen or terminated pension plans, up from 7 percent a year earlier, said consultant Watson Wyatt Worldwide. Experts expect the trend to continue.

Pension reform was a major issue in Congress this year. At stake is the future of the Pension Benefit Guaranty Corp., the federal agency that insures pension benefits when private employers can't keep retirement promises. Thanks in large part to bankruptcies in the steel and airline industries, the PBGC reported a $23.1 billion deficit for the fiscal year ended Sept. 30.

To alleviate the shortfall, lawmakers want to impose stricter funding requirements, raise premiums companies pay for PBGC coverage and tighten pension accounting.

However, many believe reform will motivate companies with well-funded plans to freeze them rather than comply with the more costly regulations and pay premiums that would be used to bail out companies with underfunded plans. Well-intended reforms have had that effect in the past, and there's little reason to believe the outcome will be different this time, said Watson Wyatt consultant Frank Reagan. John G. Ferreira, a Morgan, Lewis & Bockius attorney who specializes in benefit issues, said he feels the same.

Even though President Bush's proposal to privatize a portion of the Social Security system was tabled, it reflected how policymakers are addressing the retirement savings issue. More emphasis is being placed on workers fending for themselves. That means fewer pension plans where the responsibility for saving and investing wisely falls on the employer.

As bleak as the pension picture looks, companies have set aside even less for promised retiree health-care benefits. Companies in the Standard & Poor's 500 have $292 billion in unfunded health care and other retirement benefits, vs. a $150 billion pension funding shortfall, according to S&P.

The deficit reflects failure to set aside money for benefits as well as rising health-care costs that continue to put stress on benefits provided to workers as well as retirees.

The Kaiser Family Foundation said health insurance premiums rose 9.2 percent this year. While that was the first time in five years increases were limited to single digits, it pushed the average cost of family coverage beyond what a minimum-wage worker earns in a year.

A survey of 1,883 employers by Mercer Human Resource Consulting found employers anticipate average cost increases of nearly 10 percent for their medical plans in 2006, or about three times the rate of inflation. Employers are continuing efforts to shift costs to employees as a result, the report found.

"What we've found is that even middle-income employees are feeling the burden of higher cost-shifting," said Thomas S. Tomczyk, a benefits consultant in the Pittsburgh office of Mercer Health & Benefits.

While cost-shifting will continue, some firms are pursuing other strategies, Tomczyk said, noting the growing focus on "consumerism," in which employees are asked to make informed, responsible decisions about spending health-care dollars. Companies also are investing in programs to improve employee health, such as disease management services that help patients manage chronic ailments, Tomczyk said.

Health savings accounts, tax-preferred accounts that individuals can use to pay for basic medical services, is part of the move to consumerism. Unused funds carry over from year to year. When coupled with high-deductible insurance policies, HSAs are a key part of so-called consumer-directed health plans based on the premise that individuals will be better stewards of health-care dollars if their own funds are at-risk.

Consumer-directed health plans became more popular during 2005, and that popularity is expected to grow in 2006, said Dallas L. Salisbury, president of the Employee Benefit Research Institute in Washington.

The Employee Benefit Research Institute reports that during 2004 retirement costs narrowly exceeded health care as the leading item of employers' total benefit spending - 47.1 percent for retirement, 43.2 percent for health care, and 9.8 percent for all other benefits. The health-care share of total benefits spending has grown from 8.8 percent in 1950, to 26.7 percent in 1980, to 38.3 percent in 1990, the institute report found.

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