Two Fortune 500 Companies to Freeze Pensions

American International Group Inc. (AIG) plans to freeze its two U.S. pension funds effective Jan. 1, 2016, and focus on enriching its defined contribution plans with additional contributions. The insurer’s move comes on the heels of United States Steel Corp.’s decision to freeze its pension plan effective Dec. 31, 2015.

AIG by the Numbers

In a memo addressed to AIG employees to announce the pension freeze, an executive vice president for human resources and administration, said that AIG's spending on employee retirement programs is materially higher than most of our peers, and our programs are not in line with where the marketplace is headed.

In its most recent 10-K filing, AIG's U.S. pension plans had $4.11 billion in assets and $5.77 billion in projected benefit obligations, for a funding ratio of 71.2% as of Dec. 31, 2014.

The executive added that the company is enhancing its 401(k) plans in light of employees having to “re-examine their approach to saving for retirement.”

The memo stated that starting in January, AIG will kick in 3% of an employee’s compensation each pay period up to the IRS limit and would do that even for employees not contributing to the company’s 401(k)/savings plan. “The new 3% company contribution will be provided in addition to the current matching contribution in each of these plans.”

The contribution changes apply to participants in the American International Group Inc. Incentive Savings Plan, the American General Agents' and Managers' Thrift Plan, and the Puerto Rico Capital Growth Plan.

According the plans' most recent Form 5500 filings, the American International Group Inc. Incentive Savings Plan had $3.9 billion in assets and the American General Agents' and Managers' Thrift Plan had $81.6 million in assets as of Dec. 31, 2013. An asset size for the Puerto Rico Capital Growth Plan was not revealed.

Historic Move by U. S. Steel

United States Steel Corp., which offered one of the country’s first pension plans to its employees over 100 years ago, announced that it, too, was freezing its defined benefit plan and transitioning non-union participants to a defined contribution plan.

According to the most recent 5500 filing, defined benefit assets totaled $6.4 billion as of Dec. 31, 2014, with more than 73,000 participants. In 2003, the company actually closed the main U.S. Steel pension plan to new participants.

Approximately 65% of U. S. Steel's union employees in the United States are covered by the Steelworkers Pension Trust, a multiemployer pension plan.

The company’s total defined contribution assets equaled approximately $2.1 billion as of Dec. 31. Per the company's 11-K filing, U.S. Steel’s defined contribution 401(k) plan for salaried employees had $1.1 billion in assets as of Dec. 31 and offered 22 investment fund options; the U.S. Steel union 401 (k) had $916 million in assets.

The corporate environment was quite different in 1901 when the U.S. Steel pension fund was inaugurated. According to a Pension & Investments article, the fund, then known as the Carnegie Relief Fund, was launched by steel baron and philanthropist Andrew Carnegie with $4 million in Carnegie Co. bonds. Later that same year, J.P. Morgan acquired numerous steel-related companies, including Carnegie, to form U.S. Steel Corp. In 1911, U.S. Steel joined the Carnegie fund encompassing all its other employees, and contributed $8 million to the pension fund. In 1914, the pension fund was incorporated as the U.S. Steel & Carnegie Pension Fund.

Summary: Changing Corporate Landscape

In the past 15 to 20 years, corporate America has been moving away from the traditional defined benefit plan model first pioneered by Mr. Carnegie in 1901. His approach involved investing pension assets for use in investment earnings to pay out retirement benefits.

This current shift could not be more apparent as shown in a Towers Watson & Co. analysis, which found that 299 companies on the Fortune 500 list offered defined benefit plans to new hires in 1998. By 2014, that number dropped to 111 companies. In addition, Fortune 500 companies solely offering defined contribution plans climbed from 195 to 389 during the same period.

Large pension obligations coupled with a modified global business model has brought many companies to re-think the way they help employees save for retirement. Several contributing factors have sped this process along, including: a steady drop in interest rates that raised the cost of pension liabilities; tougher funding rules under amendments to the Employee Retirement Income Security Act of 1974; and trends toward a more transient workforce, which is not compatible to the longer-term basis of defined benefit plans.

August, 2015

ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.