Standard plans losing money and viability.

When it comes to pensions, Los Angeles is a land of haves and have-nots.

A few large, name-brand companies are still offering traditional plans--Disney, Edison and Northrop Grumman among them--despite pension meltdowns at other large companies nationwide.

But in an era when small entrepreneurial companies dominate the L.A. economic landscape, the traditional defined benefit pension plan that provided veteran workers long-term security into their Golden Years is fast becoming an endangered species. Only 17 percent of area companies now offer such plans, with the number dwindling by the year, according to one recent survey.

Now, between accelerated funding deadlines in recent federal legislation and proposed financial accounting rules that more closely tie pension liability to the bottom line, public companies in particular and private ones as well may have a harder time justifying the expense.

"You can view pensions and other deferred compensation as an asset that helps a company attract and retain employees," said Credit Suisse equity analyst David Zion, who has been warning about the looming hit to market capitalizations once public companies more clearly disclose the costs of defined-benefit plans. "The problem is most of these plans are underfunded, and not in the best shape. That makes them a potential liability."

Zion's research on the pension vulnerabilities of S&P 500 companies is among a raft of studies highlighting a looming U.S. pension crisis, compounded by eroding Social Security benefits and anemic personal savings among Americans likely to survive more years in retirement than their parents.

It's a crisis that was addressed in federal legislation signed this summer by President Bush: the Pension Protection Act of 2006 imposed a seven-year deadline for companies to fully fund their plans, and it includes provisions that increase the attractiveness of alternatives such as 401 (k)s.

The political will to take the action came after growing evidence that the Pension Benefit Guarantee Corp., a federally chartered company that insures many U.S. pensions plans, had become so overwhelmed by potential liabilities as to be in danger of one day needing a government bailout similar to the savings and loan crisis of the 1980s.

But the legislation, as well as the proposed accounting changes, are only expected to accelerate a trend since the 1980s of companies shifting to their employees the liability for providing the bulk of their retirement income through 401 (k) type programs. A Congressional Research Service analysis of census data concluded that the percentage of workers whose employer sponsored a retirement plan fell to 59.7 percent in 2005 from 61.8 percent the year before.

"People who have kept these (traditional pension) programs are getting a lot of signals that this might be the time to get out," said Nevin Addams, editor of the trade magazine Plansponsor. "The only good thing pension Supporters got out of the legislation was some clarity about the allowed structure of some of the alternatives."

Pension town

The origins of the pension crisis boil down to demographics and human inertia. Though fewer Angelenos now count on employer pensions than in decades past, like most other Americans they are living longer and saving less.

At the same time, corporate watchdogs note, Congress and regulators rarely have held companies' feet to the fire over fully funding their pension obligations, allowing for fuzzy accounting that give companies more leeway in keeping their contributions on schedule.

During the 1990s tech boom, the rising value of pension assets--at least on paper--enabled many companies to avoid making any plan contributions for several years. As the stock market plummeted in 2001, companies sought relief from legislators as the gap between assets and liabilities widened.

Historically in Los Angeles, the city's economic base was dominated by aerospace and other manufacturers, and a significant portion of its workforce was covered by pensions. But over the last quarter century, as large corporations and unionized manufacturing firms have disappeared from the local landscape, that is no longer the case.

"You have thousands upon thousands of small firms that weren't ever in defined benefit plans," said Matt Bartosiak, manager of the consulting helpline for the Employers Group, a Los Angeles-based human resources consulting firm.

These companies are in newer industries that used other means to lure workers, like stock options for the high-tech sector or sign-on bonuses in other industries. "We're a region of entrepreneurial startups that never even considered defined benefit plans for their workers," Bartosiak said.

Even so, more than 1,600 corporate pension plans in Los Angeles County are insured by the Guarantee Corp., including those of more than a dozen public companies. They include some of the county's largest publicly held employers, such as Countrywide Financial Corp., and Occidental Petroleum Corp. in addition to the Walt Disney Co., Edison International and Northrop Grumman Corp.

However, it's unclear just how long even these companies will continue to offer their defined benefit pensions. California pension plans, with total liabilities of $80 billion in 2003, were underfunded by $14 billion that year, according to the most recent data from the Guarantee Corp., which doesn't release that level of detail for counties.

Some short

And a survey of 100 large U.S. companies by Seattle-based benefit consulting firm Milliman Inc. found that Northrop Grumman's pension plan, which had $20.7 billion in benefit obligations in 2005, was $1.8 billion short of being fully funded. Edison, whose significantly smaller plan had $3.4 billion in obligations, was $219 million short. Both companies report having made subsequent contributions to their plans, but declined to speak on record about their programs.

Moreover, there has been a series of high-profile cases of companies either defaulting or freezing their pension obligations.

A federal bankruptcy judge in May approved the largest pension plan default in U.S. history, allowing the Chicago-based parent of United Airlines to pass off to the Guarantee Corp. $9.8 billion in pension obligations to 122,000 workers and retirees. But given the insurer's mandated payment ceilings, few United employees are likely to get anywhere near the amount of money they were expecting.

And even as President Bush was preparing to sign the pension reform package last month, the relatively healthy Wilmington, Del.-based chemical giant Du Pont de Nemours & Co. said it was freezing future benefit accruals in its pension plan at the end of this year and would instead increase matching contributions to the company's 401(k) plan.

In addition, the Guarantee Corp. has taken over responsibility for nearly 100 companies in Los Angeles County since 1977, 20 of them in the last six years. Typically, the plan sponsor filed for Chapter 11 restructuring or went out of business. The most recent takeover was in June of Los Angeles-based Modern Faucet Manufacturing Co., which had 66 vested employees and 28 pensioners.

Changing benefits

Still, despite the financial strain of offering traditional pension, no big Los Angeles area companies say they are contemplating following DuPont's lead--though Disney long ago froze access to its post-retirement medical plans for employees hired after 1993.

At the end of fiscal 2005, Walt Disney Co. reported projected pension obligations of $4.5 billion, with plan assets of valued at just $3.4 billion. In this year's third quarter ended June 30, available cash-flow enabled the Burbank-based entertainment giant to make a large $334 million combined contribution to its pension and post-retirement medical plans. The company said in regulatory filings that it expects to add another $38 million to the funds during the fourth quarter. Disney executives declined to speak on record for this article.

"There's still a lot more of these programs out there than people realize, and they're not all United Airlines," Addams said. "The ones that are working hard, making their contributions, keeping the plans well-funded and have a workplace where employees appreciate the benefit that's not nearly as sexy to write about."

But an increasing number of both public and private companies no longer even offer the plans to new hires or freeze future payments to vested employees at current years of service. Among them are Hilton Hotels Corp., SCPIE Holdings Inc. and Reinhold Industries. These companies now offer defined contribution plans that shift most of the responsibility for retirement savings onto their workers.

But even as critics worry about an impending retirement crisis among older workers, many applaud the move toward defined contribution plans such as 401(k)s as necessary to make U.S. companies more competitive in a global market and encourage American workers to take more responsibility for their financial security.

"In other countries, those benefits are provided by the government, so (their) companies don't have to pick up the tab," said Lynn Dudley, vice president of retirement policy at the American Benefits Council, a Washington D.C.-based trade group that represents employers on benefits issues. "Also, within the U.S., companies that have defined benefit plans are often at a competitive disadvantage with companies that offer defined contribution plans, like 401(k)'s."

DuPont's move--known in the benefits industry as a "hard freeze," where no one accrues any benefits after a set date--is increasingly typical of large companies, according to Eddie Adkins, partner in the national tax office of Grant Thornton LLP in Washington D.C.

"This trend has been going on for decades, but it's really heated up in the past couple of years," Adkins said. One reason: as more and more companies freeze their plans, other companies have to do the same just to remain competitive.

Cost-effective

But often lost in the debate over the relevancy of pensions today is the fact that pensions were long considered one of the most cost-effective deferred compensation tools for companies to attract and retain workers. In that arrangement, rank-and-file employees would agree to accept a smaller weekly paycheck in exchange for the promise of a future monthly pension check. Companies, which had significant leeway in how and when they funded the plans, were basically borrowing from their employees to fund the company' s growth.

"People who gave up wages for years and now have their pensions frozen or eliminated feel like they've been kicked in the stomach," said Karen Ferguson, director of the Washington, D.C.-based advocacy group the Pension Rights Center.

"It's one thing if a company is insolvent or needs to do this to remain solvent, but for older employees, when healthy companies do it to pump up the bottom line on a short-term basis, they feel betrayed."

Though the highest profile pension meltdowns have occurred in the East Coast and Midwest, the United collapse galvanized outgoing Assemblyman Johan Klehs, DHayward, to sponsor legislation prohibiting companies headquartered in the state from making a dividend distribution to shareholders if they had failed to pay a pension obligation.

AB 2122 was held up in the Senate Banking and Finance Committee when the session ended this year, so Klehs is looking for a colleague to resurrect the issue after he leaves the legislature due to term limits.

"In California, we have many United employees either based here or retired here, particularly in the Bay Area," Klehs said. "I've felt for a long time there should be some nationwide protections for employees who have pensions. I looked to what we could do in California, still staying within the (federal) laws, to get the ball rolling."

Fuzzy Numbers

RUNNING in a parallel track to legislative reforms have been investigations into pensions by the Securities and Exchange Commission and deliberations by the independent Financial Accounting Standards Board.

Both the SEC and FASB concluded that shareholders would be better served if companies were made to follow pension accounting rules similar to those already in place in Europe. Profits or losses on a pension fund would based on the account balances at the end of the financial reporting period--typically the year-end report- rather than giving companies the option to pick a date up to three months before.

In addition, FASB is expected to finalize rules changes this month that will require companies to revise the way they document and project future pension obligations. Currently, pension plan surpluses and deficits are listed in footnotes that company balance sheets; the FASB rules would require that as of next year, companies must list those surpluses or deficits on the balance sheets themselves.

In a recent analysis, Credit Suisse estimated that nearly $500 billion in combined pension and post-retirement plan underfunding in 2005 would have reduced aggregate S&P 500 shareholder equity by 6 percent if placed on balance sheets. Around 22 complies, none in Los Angeles, would have seen a 25 percent decline in equity.

Duane Rocheleau, head of the Investment Solutions Team at pension assets manager Northern-Trust Corp., foresees circumstances in which a company might decide to borrow in order to make a cash contribution to their pension plan.

The strategy has its risks because the loans would have to he paid off from earnings of the corporation and would decrease a company's ability to borrow for grow their business. "But for some companies, it's a risk they may decide they need to take," Rochaleau said.

--Deborah Crowe

BY DEBORAH CROWE

AND HOWARD FINE 

Staff Reporters

Big Burden

The 12 largest pension plans in the United States were cumulatively
underfunded by nearly $30 billion in 2005. Here's a look at them.

                                                 (Deficit)/
Company               Assets *   Funded Ratio    Surplus *

General Motors        $105.2         95.8%          $(4.6)
IBM                     80.1         96.3%           (3.0)
Ford                    63.8         85.5%          (10.8)
General Electric        54.3        105.6%            2.9
AT&T                    48.8        105.6%            2.6
Boeing                  43.5         96.2            (1.7)
Verizon                  41         109.1%            3.4
Lucent Technologies      34         108.6             2.7
Lockheed Martin         23.4         82.4%           (5.0)
DuPont                  19.8         86.3%           (3.1)
Exxon Mobil             19.3         63.3%          (11.2)
Northrop Grumman        18.9         91.2%           (1.8)

* in billions

Source: Milliman Consultants and Actuaries