Human Capital & Careers

SBC Shifts to Old-Style Defined Benefits

SBC moves back to basics by replacing its cash-balance plan with a more traditional pension plan.
Stephen TaubJanuary 27, 2005

In a surprising reversal of a long-standing trend, officials at SBC Communications Inc. said the company will move 55,000 salaried managers from its cash-balance pension funds to a more traditional defined-benefit plan.

The telecom giant made the decision to reward long-term employees, according to the Los Angeles Times. “We want to reward those who stay with us a long time,” SBC representative Anne Vincent told the paper.

The company also confirmed that the move to traditional defined-benefits pension plans will cut its pension liability and generate gains that will be recognized over time, although management did not say how great those gains would be, The Wall Street Journal reported.

Recently, many companies with traditional defined-benefit plans have been moving to new hybrid structures like “cash-balance” plans because they are deemed to be less expensive and more predictable for employers in terms of funding, explained the Times.

Unlike employer contributions to traditional defined-benefit plans, which are based on the present value of projected future benefits, employer payouts to cash-balance plans are based on a percentage of employee pay. Cash-balance plans, however, have been controversial and triggered a number of lawsuits amid charges that the retirement plans discriminate against older workers.

SBC converted its management pension plan to a cash-balance plan in 1997, according to the Journal. Officials moved all managers of companies it acquired during a recent buying spree to the hybrid plan in 2001, Vincent told the Times. She asserted that the cash-balance system tended to favor fully vested employees who quit or retired early, while defined-benefit plans favor employees who stay with the company until normal retirement age.

According to the Journal, companies that adopt cash-balance plans argue that they’re better for young workers and people who remain on the job at least five years to qualify for a benefit, because they can build up savings more quickly and usually can take the money in a lump sum when they leave. But moving older, longer-tenured workers to a cash-balance plan can reduce their pensions by 20 percent to 50 percent, the newspaper reported.

Under SBC’s plan, cash-balance and pension equity plans (another type of hybrid plan) will be frozen for managers, and all new pension contributions will be placed in a traditional defined-benefit plan. The move will not affect about 100,000 union-represented workers, who already have traditional pension benefits, noted the Times, citing Candice Johnson, a representative of the Communications Workers of America.

“This could be the beginning of a trend if Congress resolves some issues around pension funding reform,” Lynn Dudley, vice president and general counsel at the American Benefits Council in Washington, told the L.A. paper. She believes a likely labor shortage over the next 10 to 20 years may encourage companies to shift to defined-benefits plans as a way to urge long-service workers to stay on.

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