Are Pensions Poised to Make a Comeback?

Total rewards is a pendulum. New benefits emerge, while older and little-used ones are phased out. Annual salary hikes come and go, depending on the economy. The same often goes for bonuses and other perks.

Now, the latest point of conversation among total rewards experts is about one of the oldest benefits offerings: pensions.

“We are having a conversation about pensions that we wouldn’t have had two or three years ago,” said Beth Ashmore, managing director, retirement at consulting firm WTW.

The latest talk about pensions (at least this time around) may be new, but it’s growing.

IBM announced a shocking benefits twist late last year: It was ending its 401(k) match for its roughly 300,000 employees and switching to a defined benefit (DB) plan with no employee contribution—essentially a pension plan.

IBM employees can still contribute to their 401(k) plans, but the tech company ended its dollar-for-dollar 5 percent employee match in that program. Instead, IBM will contribute 5 percent of an employee’s salary to the new account, which provides a 6 percent guaranteed, tax-deferred return for the first three years. Then, from 2027 through 2034, the account will yield a guaranteed return equal to the 10-year Treasury rate, which currently sits around 4.2 percent.

“Under the plan, IBM bears 100 percent of the risk and must be prepared to pay the benefit at time of employee separation,” the company said in a statement.

The announcement is a significant one, given IBM’s size and scope. Not only that, but Big Blue has long been a retirement trendsetter: It was among the first large companies to offer a 401(k) plan in the 1980s, and it also froze its pension plan in 2008, which prompted other firms to do so as well. That’s why some industry experts point to IBM as a bellwether when it comes to employer retirement strategies.

“We are confident that other employers have taken notice of what IBM is doing,” said Jonathan Price, national retirement practice leader at benefits consulting firm Segal. “Even before that [announcement], many organizations were already having conversations about whether this type of shift is right for them. Therefore, we are confident that other employers will make a similar shift. How many and in what year—whether it’s 2024 or 2025—we will have to see, but we are fully confident that other employers will follow suit.”

Price predicted that at least two more big companies will announce their own pension plans in 2024.

While pensions have lost ground in recent years to 401(k) plans, experts say they may be ready for a comeback of sorts. Not only are employers thinking about adding or unfreezing pensions, they are also considering modernizing and diversifying the accounts to make them more attractive and flexible for employees.

John Lowell, a partner with consulting firm October Three in Woodstock, Ga., said that while the IBM news might push momentum further, employers were already beginning to look again at defined benefit plans.

“I do think there is going to be somewhat of a rebirth of pensions,” Lowell said, adding that he’s had conversations with several companies that are considering this. “And there are a few reasons behind it.”

Well-Funded Pension Plans

An analysis released by WTW in January found that the largest DB pension plans in the U.S. ended 2023 fully funded for the first time since the 2008 financial crisis.

WTW examined pension plan data for 358 Fortune 1000 companies that sponsor U.S. DB pension plans and end their fiscal year in December. The aggregate pension-funded status of these plans at the end of 2023 is estimated to be 100 percent, two percentage points higher than at the end of 2022. The analysis found the funding deficit has closed, improving from the $25 billion deficit at the end of 2022. Pension obligations declined slightly (3 percent) from $1.23 trillion at the end of 2022 to an estimated $1.19 trillion at the end of 2023.

That’s undoubtedly good news for plan sponsors, Ashmore said—and it indicates that employers have more flexibility in managing their funds and covering their accrued pension benefits owed, as well as future obligations.

“It’s a nice spot to be in,” she said.

The improvement of funded status across the DB industry “creates exciting new opportunities to explore uses of pension surplus,” added Justin Owens, director and co-head of strategic asset allocation at Russell Investments, an investment firm headquartered in Seattle.

“Plan sponsors of overfunded plans, or those just developing their endgame DB plan strategies, ought to take notice of IBM’s recent announcement and consider the potential advantages of reopening their DB plans,” he said.

Employers can, in a sense, save money by turning to their pension plans and not funneling money into employees’ 401(k) accounts, Lowell said. “If you have a frozen pension plan, like IBM, that is pretty meaningfully overfunded, and you do away with the 401(k) match, you are going to save money,” he explained. “For IBM in particular, at least for the first several years, they’re going to presumably pay for those pension credits out of that surplus. So they’re going to be saving pretty darn close to 6 percent of payroll in cash.”

That’s a powerful incentive, although Lowell recommends that employers not completely eliminate 401(k) matches, given negative feelings that employees may have about such an announcement. Instead, employers could decrease their matching contribution and still come out ahead in terms of funds.

Financial Insecurity Spurs Change

In addition to more fully funded pensions, experts said the primary reason for the increased interest in pensions is because of how the retirement landscape is looking.  

The conversation about pensions is happening amid a backdrop of dire retirement stats: In 2023, both workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement fell to the lowest rate since the Great Recession, dropping to 64 percent from 73 percent among workers and to 73 percent from 77 percent among retirees, according to data from the Employee Benefit Research Institute (EBRI) and Greenwald Research.

And sky-high inflation, the pandemic and other woes have caused a significant number of employees to dip into their 401(k)s. Nearly a third (30 percent) of workers tapped into their retirement savings over the past 12 months to pay for short-term expenses, according to a December Betterment at Work survey.

Plus, employees have been fretting over seeing their 401(k) balances fluctuate due to significant market swings.

“There’s this recognition that we need to change what we are doing,” Ashmore said. “We have a lot of employers that are saying, ‘Wait a minute; is this right? Because we have a retirement program, but we have a lot of employees not benefiting from it.’ ”

At a high level, pensions can help change the game by guaranteeing employees an income in retirement. The onus of managing the fund is on the employer, who decides how much an employee gets in their pension, an amount usually determined by metrics including salary and years of service. With a 401(k), many workers struggle to figure out the details and have to prioritize the plan among more immediate financial obligations, such as paying their mortgage or paying down other debt.

“The role of retirement savings when it’s actively required of the individual, like a 401(k), is incredibly complicated,” Price said. “How much do I need to save? How much do I take out? And how do I put it back in? These are incredibly critical questions that are really hard for the individual to assess on their own. And it’s all a moving target.”

Pensions, he said, can “solve all of those problems in one neat design.”

“That’s the beauty of it, which is that the employer, the institutional experts, can create an infrastructure that saves collectively for all employees the right amount of money. Each of them will get a predictable income stream in retirement, one that is stable and secure.”

Price noted that pensions also have one big draw for employers: They’re an appealing benefit and will ultimately help attract and retain talent.

Employees often rate pensions as a highly desired benefit, he said, while others are looking for guaranteed retirement income. About 4 in 10 workers with 401(k)s told EBRI that investment options that provide guaranteed retirement income would be the most valuable improvement to their employer-sponsored plan.

“We’re anticipating that in 2024, 2025, we start to see additional employers say, ‘You know what? We can actually help our employees, and we can differentiate ourselves as an employer of choice,’ ” Price said.

Looking at the Long Term

While a newfound interest in pensions is growing, the plans may not make a dramatic comeback.

Although there has been forward momentum, there’s also been some backtracking. For instance, 3M announced earlier this year that it will freeze its U.S. pension plans for nonunion employees at the end of 2028.

Experts said they don’t think pensions will overtake 401(k)s—at least not anytime soon. The more likely outcome is that pensions would be added to 401(k)s to give employees more meaningful help.

Lowell said that even though he believes there will be more movement on pensions, it will be slow. It will also likely depend on if several companies announce pension news in the next year or two.

“I think if 10 companies come out and say they’re doing it, then 20 more will follow, I think 50 more will follow,” he said. “But then at some point, we’re going to reach our limit, and we’re just going to be done with the following, and that will do it. At the same time, if companies see people leaving, and they do exit interviews, and [an employee leaving for a company with a pension plan] comes up, they may give it some thought.”

Ultimately, an organization will have to think about its workers and their retirement challenges as it designs solutions and plans to address them. A pension plan, Lowell said, will work better for employers that have employees who stay with them a significant amount of time. It wouldn’t be as attractive for, say, a retailer or restaurant.

The biggest difference the pension trend is making is that employers are giving serious thought to how to meaningfully help employees prepare for retirement.

“With all the components of the market, and inflation and everything like that, we finally have a lot of employers really looking at their retirement programs,” Ashmore said. “It’s a pretty hefty investment and a big part of their total rewards. More are having the recognition of making sure they are getting this right and having programs that situate their employees for retirement. That’s the important part.”

See also: 5 Tips for Employers Reconsidering Pensions