ExxonMobil is Cutting Costs, Will a Pension Freeze be Next?

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Over the past several months ExxonMobil has instituted a number of cost cutting measures in order to stay afloat during this tough economic time. Reuters reported that ExxonMobil has now experienced, “its first back-to-back quarterly loss in 36 years because of the drop in demand during the novel coronavirus pandemic”. On top of that Forbes has stated that ExxonMobil had “a first-quarter loss of $610 million, a 126% decrease from the same time period last year, after a plunge in the price of oil”. With devastating numbers like these, ExxonMobil needed to do something to lower its expenses. Recently, ExxonMobil announced to its employees that it would no longer be matching worker’s contributions to their retirement savings plans beginning October 1st, 2020. ExxonMobil had previously offered employees a matching program on both the U.S. ExxonMobil Savings Plan (ESMP) & the U.S. ExxonMobil Supplemental Savings Plan (SSP). 

In addition to dropping the Company Match program, ExxonMobil also adjusted its performance evaluation process to include more employees in the “Needs Significant Improvement” (NSI) category. Employees placed in this category received a “Performance Improvement Plan” (PIP) which is essentially a severance offer with an option to enroll in an improvement process and potentially keep your job. An ExxonMobil spokesperson told Business Insider that this was not a cost cutting measure and stated the company does not intend to, ““reduce headcount through [their] talent management process”. However, in April the NSI category was expanded from 3% of U.S. salaried employees to 10%, leading many to speculate this was an attempt to cut jobs without using a typical layoff. 

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But will these cost cutting measures be enough? Could a pension freeze be the next step? 

Companies have been effective in saving money by freezing their pension plans in the past. Verizon froze their pension back in 2005. Alternatively, they offered employees an enhancement to the existing 401(k) plans, which began in 2006. 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.

There has been a growing economic trend in which corporations are attempting to move away from Defined-Benefit (DB) plans & move toward Defined Contribution (DC) plans. The total number of corporate pension plans has steadily declined since the early 1980’s. AARP has stated 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”. On top of that Barron’s reported that, about 60% of the $28 trillion in U.S. retirement assets are found in defined contribution (DC) plans. In the year 2000, when many more companies offered DB plans, that number was under 50%. It’s becoming less common for an employee to work at the same company for 30 years and retire with a nice pension.  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. 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 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 ExxonMobil, this can shift risk from the corporation onto their workers.

On the whole, this trend is good for investors because investments become less risky when companies are able to lessen their debt. 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. 

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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 ExxonMobil Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://energy.theretirementgroup.com/exxonmobil-educate

“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.