Will AT&T Freeze its Pension?

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John Stankey, CEO of AT&T, has made some comments at a recent town hall which discuss another way to reach AT&T’s goal of $10 billion in costs cuts. Stankey has said before that this goal would be partially achieved through job cuts, but it appears he has an additional strategy in mind.

Mr. Stankey seems to allude to the fact that AT&T is considering freezing their pension program. A post on Layoff.com/at-and-t quoted Stankey saying, “new employees don’t come here to work 30-35 years and frankly we may not want them to either”. This comment alone would not be cause for concern considering younger employees are much more mobile in their careers compared to their parent’s generation. However, Stankey discusses that the benefits need to match the tenure AT&T wants. The AT&T pension plan currently incentivizes staying to age 50 with 25 years (Mod75) of service. If an employee does not make it to age 50 with 25 years of service their benefit will be negatively affected. See the AT&T Pension Deep Dive Article. AT&T clearly does not want long tenure, so a long-term incentive based pension plan does not make much sense. This has led some employees to speculate that AT&T may be planning on freezing their pension program. 

What would a AT&T pension freeze mean?

According to AARP, “When a company freezes its pension plan, that typically means the employees won’t be able to accumulate any additional future benefits after the freeze takes effect”. 

Read: AT&T? What Corporations will do to Save Their Dividend

AT&T’s main competitor, Verizon, froze their pension back in 2005. According to ABC News, Verizon stopped contributing to the pension plans of managers who did not belong to a union. Alternatively, they offered them an enhancement to the existing 401(k) plans, which began in 2006. The cut affected 50,000 management employees. At the time Verizon justified the cuts by claiming, “its future economic picture made it necessary”. Freezing the pension in this case was an attempt to lower labor costs in order to better compete with competitors. ABC reported at the time that Verizon hoped to save $3 billion over a 10 year period by switching from a defined benefit (DB) pension plan to an enhanced 401(k) plan.

Corporate pension plans have been steadily declining since their peak in 1983. AARP reported that, “The number of corporate pension plans with 100 or more members has fallen from almost 26,000 in 1983, the peak, to about 8,400 in 2016…That’s a drop of two-thirds in about 35 years”. According to Barron’s, around 60% of the estimated $28 trillion in U.S. retirement assets are held in defined contribution (DC) plans. That number was less than 50% in the year 2000, as many more corporations still used DB plans. The days of employees working at a company for several decades and retiring with a nice pension are quickly fading away.  More corporations are freezing/off-loading DB pension plans in order to more effectively manage the size of their current pension obligations. According to Barron’s, by placing workers in a DC plan the, “corporate pension plan stops accruing new benefits as workers age and salaries rise”.

Barron’s references several companies who’ve decided to recently freeze their defined-benefit pension plans, most notably General Electric & Lockheed Martin. General Electric is freezing its pension for 20,700 employees and has offered 100,00 former employees a buyout option for existing retirees. The buyout option is another tactic corporations will use to cut costs. According to The Retirement Group, DB plans which provide a life long monthly benefit to AT&T retirees often create huge pension liabilities for the company. However, “by offering both workers and retirees a lump sum, corporations could take the defined-benefit off their books”. For companies like AT&T, this can shift risk from the corporation onto their workers.

On the whole, this trend is good for investors because as companies are able to lessen their debt investments become less risky. However losing DB plans is very bad for employees who often rely on those benefits for their retirement years. Typically, employees in the mid to late portion of their career are hurt the most by a pension freeze. If your pension is frozen it’s a good idea to ask your HR department for an estimate of your pension benefits upon retirement. ARRP suggests asking for estimates on your lump-sum payment & your monthly payout. It’s also wise to ask what the payout would be for a spouse if you were to pass away. 

To learn what AT&T is doing to save its dividend click here: https://techstaffer.blog/2020/08/06/att-what-companies-will-do-to-save-their-dividend/

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Sources:

Noe, Eric. “After Verizon, Are Pension Freezes on the Way? – ABC News.” ABC News, ABC News, 16 Dec. 2005, https://abcnews.go.com/Business/story?id=1378711.

“The Retirement/Transition Guide for AT&T Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://telecom.theretirementgroup.com/att-guide-download-google

“Pension Lump-Sum Payment Windows Are Back.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://retirekit.theretirementgroup.com/pension-lump-sum-payment-windows-are-back-e-brochure

Root, Al. “Pension Plans Continue to Fade Away. Why That Brings New Worries.” Barron’s | Financial and Investment News, Barrons, 11 May 2020, https://www.barrons.com/articles/pension-plans-continue-to-fade-away-why-that-brings-new-worries-51589199204.

Waggoner, John. “What to Do If Your Pension Is Frozen.” AARP, 16 Oct. 2019, https://www.aarp.org/retirement/planning-for-retirement/info-2019/pension-plan-freeze.html#:~:text=Other%20major%20companies%20that%20recently,be%20a%20big%20financial%20hit.

“AT&T Layoffs – TheLayoff.Com.” TheLayoff.Com, https://www.thelayoff.com/at-and-t. Accessed 13 Aug. 2020.