IBM freezes DB accruals

[Guest mjb]

IBM has announced that it will freeze accruals to its DB plan beginning 2008. Last year IBM closed participation in the plan to new employees. IBM had added 6B in assets in the last 4 yrs to fully fund the plan and has an exposure of up to 1.4B arising from a judgment involving its cash balance plan. IBM's pension plan with 48B in assets is the third largest in the US after GM and GEs plans. The DB plan will be replaced with a 401k plan which will provided fixed contributions to participants in addition to matching contributions. IBMs stated reasons for freezing the plan is that the low rate of return on long term interest rates added 100M to the cost of the US plan in 2005 and increases in life expectency created unexpected future costs.

IBM's trasurer said "These plans were never designed to cover obligations that run as long as people are now living. Its important for companies to take actions to deal with this before these plans drag them into trouble. "

[Guest Harry O]

The anti-cash balance plan brigade also played a large role in the demise of the IBM plans. What sane employer would sponsor a hybrid DB plan given the ridiculously large legal exposure created by a crackpot decision in the Southern District of Illinois. The Ellen Schultz's of the world (from the WSJ) whined about how unfair hybrid plans were to older employees. Well now these employees have nothing. I hope she's happy.

Many large employers I work with would gladly switch to a hybrid plan from a traditional FAP plan where the accounting costs are less predictable. But they won't as long as the anti-cash balance zealots and plaintiffs' lawyers are running loose. So what happens? They freeze the traditional DB plan and employees get some crumbs in the form of an increased matching contribution. In addition, the PBCG's premium payor pool continues to decline.

It is a shame that we've come to this . . . a little political courage in the Treasury and IRS in the mid-1990s would have avoided this unfortunate result for rank and file employees and the PBGC (and ultimately the U.S. taxpayers).