UPS to Freeze Pensions for 70,000 Workers to Reduce Costs
(Bloomberg) -- United Parcel Service Inc. will freeze a pension plan for about 70,000 nonunion U.S. employees because of escalating costs and volatility in determining future payments, replacing it with a different retirement benefit.
UPS joins companies including DuPont Co. and Lockheed Martin Corp. in freezing pensions, which means that some or all participants may stop accumulating benefits. UPS’s retirement obligations are on top of a $1 billion jump in capital spending being planned for this year to handle a surge in e-commerce shipments.
“It’s not a red flag,” said Kevin Sterling, a Seaport Global Holdings analyst. “Combine how much money they are spending on automation and on planes, along with discount rates being low maybe forever, and they said ‘we have to cap this or we’ll continue to see funding shortfalls.’”
UPS’s pension plans in the U.S. had a $9.85 billion shortfall at the end of last year, meaning they were about 76 percent funded, according to regulatory filings.
The shift won’t occur until Jan. 1, 2023, giving affected workers more than five years to prepare, Atlanta-based UPS said Tuesday. Most of the employees, which account for about 16 percent of the workforce, are in administrative or management positions.
After accruals to the existing defined benefit retirement plan stop in 2023, UPS will begin a contribution program that will place between 5 percent and 8 percent of a worker’s eligible salary into a 401(k), depending on seniority. Some workers also will get a transition benefit.
Current retirees aren’t affected, said Steve Gaut, a company spokesman. UPS declined to comment on the cost of the changes but said the amount is reflected in its existing 2017 financial targets.
“It’s something that’s been contemplated for quite some time, studied in some detail,” Gaut said in an interview. “This just makes it more predictable for the company.”
Last year, about 22,000 former UPS employees accepted one-time lump sums of their vested pension benefit under a buyout offer, accelerating payments of $685 million, the company said.
About 39 percent of Fortune 500 companies with pensions had frozen them by the end of 2015, an increase from 21 percent in 2009, according to a study from Willis Towers Watson Plc. The plans became more expensive to maintain after interest rates fell during the financial crisis.
Firms including FedEx Corp. and Delta Air Lines Inc. issued debt this year to help fund retirement programs. Still, the 100 largest corporate defined-benefit pension plans faced a total shortfall of $279 billion at the end of May, according to actuarial firm Milliman.