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Many Companies Will Have Steep Rise In Defined-Benefit Pension Expenses

By Marcella De Simone

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Many Companies Will Have Steep Rise In Defined-Benefit Pension Expenses

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Many employers will have to spend huge sums this year to make up for investment losses in traditional defined-benefit pension plans, according to a new survey from the Chicago office of Deloitte & Touche L.L.P.

Executives at 40% of the 80 large and midsize companies that participated say their companies pension expenses will increase by more than 50% in 2003. Another 20% expect increases between 26% and 50%.

Sponsors of 12% of the participating defined-benefit plans have already decided to respond to the increases by making fundamental changes, such as shifts to entirely new types of plans.

David Hilko, Deloittes benefits practice leader in Chicago, says the massive pension funding shortfalls could hurt agents who sell group benefits.

“Companies are looking for ways to reduce the increased costs in benefits,” Hilko says. “You may see companies reducing health benefits to get the total cost of providing benefits more in line with how they want to pay.”

But Hilko predicts that most companies that now offer pensions will stick with them.

“When all is said and done, companies understand they may have to deal with negative financial issues in the short term,” Hilko says. “No one was complaining in the 90s with the stock market run-up. I think companies will focus on what they are trying to provide for their employees and the best program that meets that end.”

In the short run, switching plan types might actually increase an employers benefits expenses, Hilko says.

Sponsors of defined-benefit pension plans promise participants a certain level of income at retirement.

In recent years, the investment portfolios backing those promises have done so well that many employers have been able to skip putting in additional cash. But now that the market has suffered a sustained downturn, employers are discovering that they will have to make billions of dollars in contributions.

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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