Chevron, along with most other oil companies, is in the process of trying to cut costs to help deal with the economic downturn brought on by the Coronavirus. The pandemic hurt the entire economy, but it came down on the oil & gas industry especially hard. Chevron has chosen to conduct layoffs to try and reduce labor costs. According to Reuters Chevron plans to, “cut 10% to 15% of its worldwide workforce as part of an ongoing restructuring at the second-largest U.S. oil producer”. Other oil companies like ExxonMobil have chosen to cut benefits. ExxonMobil announced that it would stop matching employee’s contributions to their retirement savings plans. They’ve also reportedly been laying off people through a “Performance Improvement Plan”.
But will traditional cost cutting measures be enough? Could a pension freeze be the next step for Chevron?
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 100,000 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 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 Chevron, 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.
Khan, Shariq. “Exclusive: Chevron to Cut up to 15% of Staff amid Restructuring – Reuters.” U.S., Reuters, 27 May 2020, https://www.reuters.com/article/us-chevron-layoffs-exclusive/exclusive-chevron-to-cut-up-to-15-of-staff-amid-restructuring-idUSKBN2332P3.
“The Retirement/Transition Guide for Chevron Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://energy.theretirementgroup.com/chevron-guide-download-google
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.
“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.
Gross, Elana. “ExxonMobil Reportedly Changed Its Employee Review Process To Increase Performance-Related Job Cuts.” Forbes, 24 July 2020.