Upfront: Curing Pension Plan Ills

Pension plans are in crisis due to investment losses, low interest rates and intense regulatory scrutiny. For the first time, many employers are facing additional minimum liability charges under FAS 87. Plus, 2003 pension plan costs could rise at rates 25 percent to 50 percent higher than recent years' increases.

According to a new survey by Deloitte & Touche Human Capital Advisory Services, plan sponsors are proactively managing costs using a variety of financial, actuarial and accounting techniques.

Strategies being considered by the most survey respondents: reviewing the actuarial assumptions and cost methods that their actuaries use and revising economic assumptions. Respondents are also thinking about accelerating cash contributions to their pension plans. By improving the funding position of a plan so that it meets certain thresholds, they can reduce or eliminate next year's funding requirements.

Nearly one-third of respondents plan to implement some method of asset smoothing, a technique to moderate large fluctuations in value by spreading the impact of each year's investment performance over a longer period of time. More than 40 percent of respondents are considering making changes to their defined-benefit plans. They may be overreacting to the pension crisis, because much of the current increase in plan costs results from benefits earned, which cannot be easily reduced.

The most significant type of change on defined-benefit plan sponsors' agenda affects the form of the benefit -- moving from an annuity-based formula to an account balance-based formula in cash balance, pension equity or defined-contribution plans. Respondents are also considering freezing service or pay in defined-benefit plans and reducing the plans' benefit levels, although some will change their retirement program for only a portion of their work force.