Corporations in almost every industry are in the process of trying to cut costs to help deal with the economic downturn brought on by the Coronavirus. The pandemic has taken a toll on the entire economy and companies need to take drastic measures in order to stay afloat. AT&T, for example, has expressed a goal of $10 billion in cost cuts and has already begun conducting layoffs. Chevron is another company who’s decided to reduce labor costs through job cuts. According to Reuters Chevron plans to cut 10%-15% of their global workforce. Other corporations 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”. However, sometimes these cost cutting measures are not enough and companies choose to freeze their pension programs. General Electric (GE) made huge news when it announced it would freeze its pension for 20,700 employees last year. GE has the largest pension deficit of any Fortune 500 company.
Could Northrop Grumman be the next major corporation to freeze its pension? What would be the consequences?
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”.
What would a pension freeze at Northrop Grumman look like?
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”. Verizon froze its 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 DB pension plan to an enhanced 401(k) plan.
Several companies have decided to freeze their defined-benefit pension plans this year, most notably General Electric & Lockheed Martin. In addition to GE freezing its pension for 20,700 employees it has also 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 Northrop Grumman, 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. AARP 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 Northrop Grumman Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://defense.theretirementgroup.com/northrop-grumman-educate
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.