Many companies are facing huge expense increases this year to make up for investment losses in their pension plans, according to a new survey from Deloitte & Touche LLP, a human resources and employee benefits consulting firm.
The increases in pension expenses could undercut corporate earnings growth this year and potentially dampen an economic recovery, according to the authors of the study.
In the survey of 80 mid-sized and large companies, 40 percent of respondents say their pension expenses will rise by more than 50 percent in 2003. Another 20 percent expect increases of 26 percent to 50 percent while 16 percent of respondents see expenses growing between 11 percent and 25 percent.
Largely driven by this enormous funding squeeze, more than four out of ten companies are either making or considering making fundamental changes to their defined benefit plans, the survey found. Twelve percent have already decided on changes and 31 percent are evaluating possible alternatives, such as changing to cash-balance or profit-sharing plans.
"Companies that change their pension plans solely because of stock-market volatility and the current higher expenses could be making a serious mistake," says David Hilko, practice leader of the employee benefits group for Deloitte & Touche's Chicago office. "Recruiting and retention strategies should drive benefits."
"Changes now won't fix the funding issue," Hilko adds. "The companies still must make up these major shortfalls under IRS rules. What's more, benefit expenses often rise in the short term when companies switch plans, which would simply add to the current expense crisis."
Another area of growing interest among companies is to secure a greater portion of an executive's retirement benefits, according to the survey. Nearly one in three companies surveyed has shifted or is exploring ways to shift a greater percentage of their executive benefits into more secure investment vehicles.
"More executives will require greater security as part of any employment contract," Hilko says. "While this approach is state-of-the-art for now, it soon will become standard."
The survey polled senior financial and human resources executives from 80 companies from a broad cross-section of industries with median revenue of $1 billion and an estimated average of 5,000 employees.
