After Verizon, Are Pension Freezes on the Way?

Dec. 6, 2005 — -- The latest battle in the heated telecom wars has claimed some significant new casualties -- the pension and retirement health benefits for 50,000 Verizon management employees -- and analysts say more such moves may be coming.

Verizon announced Monday it would stop making contributions to the pension plans of non-unionized managers and would instead offer them 401(k) plans, beginning in 2006.

Other big telecommunications companies are likely to make similar cost-cutting measures, said analysts familiar with the economics behind Verizon's decision.

The move raised the ire of worker advocates, but the company said its future economic picture made it necessary.

"This restructuring reflects the realities of our changing world," Verizon chairman and CEO Ivan Seidenberg said in a statement announcing the change. "Companies today, including many we compete with, are not adopting defined benefit pension plans or subsidized retiree medical benefits."

Though Verizon currently has enough money to fund its pension obligations, the company is wary of rising health care costs and competition from companies that don't offer similar defined benefit plans, which are more expensive for companies than 401(k) plans. The pension freeze is an attempt to lower labor costs and bring them in line with those of cable television companies, analysts said.

"Verizon had no choice," said Robert Rosenberg, president of Insight Research Corp., a telecommunications industry analysis firm. "It's not the type of thing a company with great corporate values would do if it didn't have to."

But what the company called corporate realities offered little consolation to angry Verizon employees.

"You're just constantly giving back. And I realize that's how corporate America is going, but that still doesn't make it right," one Verizon employee said today outside the company's corporate headquarters in New York.

Phone Companies Competing With Cable

The telecommunications sector has been hit particularly hard over the past five years, losing workers and seeing company values drop at a disproportionate rate to other industries, Rosenberg said. The need to cut costs is a response to the leaner financial times, he said.

The cost-cutting has also been accelerated by efforts to combine phone, television and Internet service into digital communications packages. Phone companies now compete with cable providers in the race to offer those services to residential customers. The telephone and cable companies have spent recent years working hard to upgrade their technology and slash their overhead.

"They're spending millions to leapfrog the capabilities of the cable providers," Rosenberg said. "These guys are going to offer all of those digital services, and wireless as well, and they're all playing for the same residential market."

Cable companies' work forces for the most part are not unionized, giving them lower labor costs than such traditional telephone companies as Verizon, SBC and BellSouth, all of which have largely unionized workers.

"Verizon is going to offer cable shortly, and they want to make sure they align their cost structure with the cable companies. That's why they're doing this," said Bob Rock, analyst with John Hancock Advisors.

Other Telecom Companies Could Follow Suit

By shifting retirement benefits from the fixed, defined benefits offered in pensions to 401(k) plans, Verizon hopes to save $3 billion over the next 10 years. The pension freeze announced on Monday affects only management, not union employees. But it's possible that similar restructuring of retirement plans will be a part of any future union negotiations.

"For management, they can cut their retirement and benefits at will. For Verizon, a significant proportion of their workers are union, so any changes to their benefits are going to have to be negotiated through collective bargaining," Rock said.

Retirement benefits, particularly health care costs, have become a huge issue across a variety of industries this year. U.S. automakers, in particular, have spoken of the burden of paying large health care benefits to retired workers. And the airline industry has experienced similar problems.

"The bottom line is premiums are going up double digits every year, and they're in the same situation as the car companies and some others," Rock said of the telecommunications industry.

Earlier this year, SBC said it would restructure its pension plan in an effort to lower the cost of its pension liability. And it's likely that competitors like BellSouth and Qwest Communications could take similar steps to keep their cost structures in line, Rosenberg said.

"Chances are, when they see this they'll all be huddling up," Rosenberg said. "This most likely will be the first of several similar announcements that we'll see."