IBM to Freeze Pensions in Cost-Cutting Move

In a move that could save it billions of dollars, IBM said it would freeze its pension plan within two years and shift more employees to beefed-up 401(k) programs.

Big Blue said the shift was part of a “global strategy” of shifting retirement benefits to “the more predictable cost structure” of a 401(k).

The changes “will give us more predictable retirement plan costs, along with benefits that remain ahead of — but more in line with — our competitors,” explained Randy MacDonald, IBM senior vice president of human resources.

More for the 401(k) Pot

“We’re taking these actions to better control retirement plan expenses, position the company for business growth and competitive strength, and preserve employees’ earned retirement benefits,” MacDonald said. “We also believe these are prudent and balanced steps at a time of uncertainty and conflicting legislative and regulatory directions about defined-benefit retirement plans in the United States.”

In conjunction with the end of the pension plan, IBM said it would enhance its 401(k) program, which is already the largest in the United States, by giving employees matches and direct contributions that could total up to 10 percent of their annual salaries.

IBM intends to open accounts for all employees, even those who do not make pre-tax contributions to the 401(k), and provide direct funding for them as well.

The changes will save the company as much as US$500 million this year, and $2.5 to $3 billion between 2006 and 2010. However, IBM still expects retirement expenses to increase by as much as $500 million this year.

Given Big Blue’s size and stature, the move may prompt other companies to re-examine whether to shift away from defined-benefit pension plans. Traditionally, larger and older companies have offered pension plans that feature a guaranteed return for retirees — which can become burdensome for a corporation.

Out of Step

Most younger technology companies never formed pension plans, going instead with the 401(k) model, which defines contributions, rather than benefits, from the outset.

IBM’s pension may have become a competitive disadvantage, not only because of the liability the massive fund represented — Big Blue’s is the third-largest such fund in the U.S. behind those of General Motors and General Electric — but also because accounting for interest and other variables often made a clear read of financial performance more challenging.

IBM’s move is a positive development, said David Grossman, an analyst with Thomas Weisel Partners.

“It should help reduce variability in earnings from non-operating factors, such as interest rates and stock market performance,” he pointed out.

Other large tech firms have been forced to address their pension plans recently. Hewlett-Packard last year said it would actively seek to shift employee accounts out of its pension plan. Verizon and Motorola have also announced changes to their pension programs.

Because pension plans are typically defined-benefit plans — the amount an employee takes out is pre-set — they can be larger liabilities for businesses. In fact, many major U.S. corporations have struggled to deal with huge pension debts, a problem that is likely to become more acute as millions of Baby Boomers prepare to retire in the next decade.

IBM’s 125,000 current U.S. retirees will continue to receive full payments, IBM said, as will anyone who retires before Jan. 1, 2008, when the plan will be frozen.

Year of Change

IBM entered 2006 as a dramatically different company than it was a year ago. Last year, it divested itself of its personal computer business, selling it to Lenovo for $1.5 billion.

IBM also slimmed down, cutting some 13,000 jobs, and shifted more work overseas to reduce costs. The savings reaped could help IBM strategically gird for battle by allowing new hires in its current key areas of focus, such as enterprise consulting, outsourcing, data networking and storage.

Efforts to revamp IBM’s pension plan have been controversial in the past. Changes made in the late 1990s drew a lawsuit from a group of employees, who won a federal court ruling against Big Blue on the grounds that the changes discriminated against older workers. That ruling is currently under appeal.