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WellPoint freezes pensions: Insurer joins national trend, shifts focus to 401(k) plan

March 20, 2006

WellPoint Inc. quietly froze pension contributions for most of its 42,000 employees earlier this year, a move that draws criticism but falls in step with what many other big employers are doing.

The Indianapolis-based health insurance giant noted deep in an annual report filed late last month that on Jan. 1 it stopped adding pay credits to the pension accounts of employees not nearing retirement.

The insurer rang up a $2.5 billion profit last year and, unlike some other companies that have announced similar moves, it did not attribute the decision to financial strain.

Rather, it stopped making credits toward the $1.9 billion pension plan because it decided to ramp up benefits that give employees greater control over their retirement savings, spokesman Jim Kappel said. Among the changes, he said, is an improved 401(k) program with a larger company match.

But in the process, WellPoint reduced the amount of company dollars feeding employee See PENSION page 49 nest eggs, according to Shaun O'Brien, assistant policy director for the Washington, D.C.-based AFL-CIO.

"This is a pay cut for these people," he said. "Less money in means less money out when you go to retire."

With the shift, WellPoint joins General Motors Corp., IBM and Verizon Communications Inc. in a growing pool of businesses that announced pension freezes that leave more responsibility for building retirement savings on the employee.

All told, about 30 percent of U.S. companies operate frozen pension plans, said Eric Dawes, an actuary for the Indianapolis law firm of Ice Miller.

"I'd say a lot of employers that haven't frozen them yet are probably thinking about it," he said.

The number of private-sector workers participating in pension plans shrank by half over the past 25 years, to about 20 percent, O'Brien said.

While some companies that freeze pensions are under financial strain, such as GM, others just don't want to provide the benefit anymore, experts say.

"To compete in the talent marketplace, they don't feel this is something they have to provide in order to stay competitive," said Beth Young, a New York-based senior research associate for The Corporate Library, a firm that provides corporate governance data.

WellPoint is the highest-profile Indiana company to rein in pension benefits in recent years. Two other firms that offer the benefits, Eli Lilly and Co. and Cummins Inc., say they have no plans to curtail them.

Nearly a decade ago, Marsh Supermarkets Inc. froze benefit accruals for its pension, giving it increased financial flexibility as it faced brutal competition in the grocery business.

Experts say companies that move away from pensions typically do so because of financial struggles, global competition or the waning influence of unions, which historically negotiated rich benefit packages for workers.

Kappel said none of those factors applies to WellPoint, where only about 1 percent of workers belong to a union.

Curtailing contributions

WellPoint, which employs roughly 3,600 people locally, told employees about the pension change after it surveyed them on benefits preferences and studied what other companies provided. Kappel declined to say which companies WellPoint studied.

Its closest competitor in size, Minnesota-based UnitedHealth Group Inc., doesn't offer a pension. Instead, it provides a 401(k) plan with a company match of 50 cents on the dollar up to 3 percent, spokeswoman Debora Spano said.

WellPoint made its changes to give employees more benefits flexibility, Kappel said.

"That was the driver," he said. "What we learned is that 401(k) plans had become more popular because of the flexibility and control over retirement savings they can offer."

The company added a health care reimbursement account that allows workers to pay for medical bills with pretax dollars. It also beefed up the 401(k) plan by boosting the dollar-for-dollar match of employee contributions up to 6 percent from 4.5 percent.

Under the revamped 401(k), employees become immediately vested instead of waiting a year, and they have more investment options, Kappel added.

However, the AFL-CIO's O'Brien said the company's 401(k) match increase will cost less than its minimum pension contribution did.

Kappel denies employees are taking a financial hit. He said WellPoint actually increased the amount it spends on total compensation for employees, which includes base pay, bonuses and benefits.

"It's not a take-away at all. As a matter of fact, it's a higher value for all employees," said Kappel, who declined to provide specific financial information.

WellPoint's pension is in solid shape, Kappel said. Last year, the plan wound up overfunded by $229 million, based on a formula that factors in projected investment returns and payouts to retirees.

The company won't turn off the pension spigot entirely. Employees still are entitled to contributions the company already has made to their plans and the interest they collect.

And about 30 percent of WellPoint's employees nationwide-or roughly 12,600 people-will continue to receive contributions, Kappel said.

"That's going to be for those associates who are here the longest and nearing retirement," he said. "A lot of thought went into what's the best way to do this."

The freeze doesn't affect retirees or the health care benefits WellPoint continues to provide them.

Cause for concern?

The WellPoint pension is what's known as a cash-balance plan. Unlike definedbenefit pensions, workers aren't guaranteed a specific payout tied to their years of service and highest annual earnings.

Participants in cash-balance plans receive credits to their account annually, typically a percentage of their compensation. The balance grows over time, and the employee is assured a certain return, regardless of actual investment performance.

Many companies with defined-benefit plans are switching to cash-balance plans, which give less weight to longevity, benefits experts say. In turn, many firms with cash-balance plans are opting for freezes in favor of beefed-up 401(k)s.

General Motors' announcement in January that it is freezing its defined-benefit pension was like "Mom and apple pie saying, 'We're not going to do pensions,'" said Grace Worley, a certified financial planner and president of Indianapolisbased Worley Financial Group Inc.

The news, "just from a psychological standpoint, has given permission to all employers with defined benefits to reconsider," she said.

The same month, IBM announced plans to freeze its defined-benefit pension at the end of next year and make its 401(k) savings plan "one of the richest in U.S. business," according to a company press release.

WellPoint's Kappel said the 401(k) option lets employees decide how to invest their retirement funds and thus gives them a say over how "those retirement dollars are going to increase."

But the reduced emphasis on pensions could pose big problems for future retirees, O'Brien said. For decades, he said, American workers depended on Social Security, a company pension and their own savings for a sound retirement.

"Now, we're talking about employees cutting out completely that middle place," he noted.

Dawes thinks retirees now face a greater risk of outliving their savings. People aren't saving enough, he said, and when they reach retirement, they tend to spend down what they have socked away instead of living off interest.

"I think this is a very significant issue for our country moving forward," he said.

Historically, companies stuck with their pensions unless they were in financial trouble and couldn't fulfill their obligations. Firms in the airline and steel industries, for instance, ultimately dumped underfunded plans on the Pension Benefit Guaranty Corp., O'Brien said.

But over the past year or so, he's also seen a growing number of healthy companies like WellPoint freeze their pensions.

"This seems to be a pretty clear trend toward less retirement security," he said.
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