Verizon Communications Inc., the second-largest U.S. phone company, said yesterday that it will phase out defined-benefit pension plans for about 50,000 management employees to save money.
New York-based Verizon, the dominant local phone company in the Washington area, said it would take a $97 million fourth-quarter pretax charge as a result but expected to save about $3 billion over the next decade because of the changes.
Verizon is the latest in a long line of U.S. companies that have phased out defined-benefit plans, which can be expensive to maintain but typically guarantee workers a set monthly payment in their retirement based on length of service and final years of salary. Many companies instead make contributions to 401(k)-style savings plans, which have no guaranteed payout amount; rather, the size of an employee's retirement nest egg is based on the success of the worker's investment decisions.
In addition to saving money, Verizon officials said they were trying to harmonize benefits among employees, including those at Verizon Wireless and at Ashburn-based MCI Inc., which the company is acquiring.
Neither MCI nor Verizon Wireless managers have defined-benefit pension plans.
"This restructuring reflects the realities of our changing world. Companies today, including many we compete with, are not adopting defined benefit pension plans or subsidized retiree medical benefits," Ivan G. Seidenberg, Verizon's chairman and chief executive, said in a statement.
As described by Verizon officials, the roughly 50,000 Verizon management workers will be eligible to save money in 401(k) plans, with the company contributing dollar for dollar for the first 6 percent of savings. Verizon, at its discretion, may contribute a further 50 cents on the dollar for the first 6 percent depending on company performance.
That would mean workers could get up to a 9 percent match on their contributions.
MCI managers, who now get a dollar-for-dollar match on employee contributions up to 5 percent of annual pay, would be raised to the new Verizon standard. Verizon Wireless workers, who now get a dollar-for-dollar match on their first 6 percent of contributions and a further 3 percent depending on company performance, would see no change to their plan.
Verizon's planned changes have no effect on current retirees, who will continue to receive their pension benefits, or on unionized employees, whose pension benefits are defined by their contracts.
Under Verizon's plan, announced in a statement late yesterday, managers affected by the changes will retain the pension benefits they have already earned, as required by law.
They will also get an extra 18 months of credit toward their pension and retiree medical benefits. That means that in the calculation of such benefits, Verizon employees will get credit for 18 months of work that they have not actually performed for the company.
This could prompt some older employees to decide to take early retirement, which they may do if they have worked at least 15 years and if their years of service and age add up to 75.
After June 30, 2006, Verizon said, its affected managers will stop earning pension benefits, shifting instead to the 401(k) plan, and they will not receive any additional credit toward the company's subsidy of retiree medical benefits.
Employees who do not have 15 years of service, including the extra 18 months, will not receive any company subsidy for retiree medical benefits. They remain eligible to buy such coverage if they pay the full premium themselves.
Verizon will benefit by eliminating some of the uncertainty associated with defined-benefit pension plans. Under federal rules, companies can be required to make contributions to their pension plans if their liabilities increase or asset values fall, making their costs unpredictable.
Once the merger with MCI goes through, which is expected by early next year, Verizon will have about 240,000 employees. Of those, about 135,000 will be management employees and about 105,000 will be unionized workers.
Over the past 20 years, thousands of U.S. companies have shed their defined-benefit pension plans to cut costs.
As of last year, there were 29,600 single-employer defined-benefit plans, down from 112,000 in 1985. However, last year there were 34 million participants -- meaning active workers and retirees -- in such plans, up 26 percent from 1980.
The increase in the number of participants reflects the fact that many of the pension plans eliminated were run by relatively small companies.
Staff writer Albert B. Crenshaw contributed to this report.