Novice Investing - Pension Plan No More

Date: Monday 01st 2008f December 2008 05:39:44 PM

Pension Plan No More - 03/08/2006

By: Novice Investing Staff

Corporate America has been slowly but steadily moved away from defined benefit to contribution plan ( 401 K ). In a defined benefit, you are entitled to a certain portion of payments after you retire when you work for a company. In a contribution plan, employees need to set aside certain portion of their salary to be eligible for retirement payment.

Up until recently, only companies in the bankruptcy court or in struggling industries abolished their defined pension plan. It all changed gradually. First, it was IBM which will abolish its defined benefit plan by January 2008. This week, General Motor followed IBM's path. It announced that newly hired will now be given a 100% contribution pension plan instead of defined benefit plan. This alone will saves the company $ 420 Million in 2007. To be fair, GM is struggling. But, other companies are surely watching this closely. As Japanese competitors gain market share partly due to a more efficient cost structure, General Motor needs to slash cost to align its cost structure. With its aging workforce, General Motor has a huge pension burden that needs to be financed. As a result, profitability suffers in the latest fiscal year.

Why should other companies care? Well, as distance gets shorter, you are not in competition with competitors next town but to other companies around the world as well. Most companies in the developing world do not offer benefits as richly as its US counterpart. Therefore, managers who were pressured from shareholders to produce profit, will look abroad to compete effectively. Other than that, if they want to retain their US workforce, the company needs to reduce its pension benefit plan.

What about companies currently in bankruptcy court? That goes without saying. Airlines in bankruptcy court such as Delta and Northwest has negotiated with its pilot and flight attendants to reduce or even eliminate their defined benefit plan.


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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Motor Corp. (GM) or any other securities.

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