More and more companies sweeten pension payments
Retired workers deserve more than a warm handshake, a gold watch, and a monthly pension check that never grows, an expanding list of companies have decided.
So these companies have started to provide periodic increases in their pension payments. ''Several years ago pension increases were unusual, now they are the norm,'' says Kenneth P. Shapiro, a partner in Hay Associates, a management consulting firm. Hay found that 58 percent of the 700 major companies it surveyed last year made adjustments in retirees' pension benefits and another 3 percent were planning such adjustments. In 1979, 51 percent of the companies surveyed adjusted pension benefits.
As long as inflation eats into senior citizens' pensions, ''there will be a continued trend toward granting increases to retired employees,'' says Sook-Kuen Chang, an assistant vice-president at Bankers Trust Company in New York. ''Corporations seem to be assuming some responsibility to employees (for this).''
In fact, a 1980 Bankers Trust study of 270 corporations found 72 percent had made some adjustment to their retirement benefits in the period between 1974 and 1979.
Not only are more companies adjusting pension checks, they are also passing along increases more frequently. ''In 1979 the average time in between adjustments was three years,'' says Philip Alden, a partner in the management consulting firm Towers, Perrin Forster & Crosby. ''It is closer to two years now.''
In the past, the time between adjustments has varied widely among individual companies. Bankers Trust found that, among companies raising pension checks, 62 percent did so once in the five-year period between 1974 and 1979. Only 28 percent adjusted checks twice in that period, 3 percent pushed up benefits three times, and only 1 percent boosted them four times.
And the frequency with which checks are increased may drop off somewhat as the recession bites into corporate profits. ''I wouldn't be surprised if (our) next study shows there had been some cutback in frequency'' because of the financial hardships many companies are weathering as a result of the recession, Mr. Alden says.
At first glance, the pension increases would not seem to add significantly to a corporation's expenses. The typical adjustment ''ranges from 2 to 4 percent'' per year of retirement since the last benefit increase, says Barnet Berrin, director of professional standards at William M. Mercer Inc., an employee benefit and compensation consulting firm.
''The most typical increase is 3 percent per year,'' says Mr. Shapiro.
But even these relatively small increases have a major effect on the total cost of providing a pension. As a rule of thumb, ''for every 1 percent in benefit increases, the cost goes up at least 10 percent,'' Mr. Shapiro says. ''A 3 percent rise in (pension) benefits could increase the cost of the plan 40 percent.''
The high cost of raising benefits is one reason most concerns do not change pension checks on any fixed schedule. Instead they rely on ad hoc increases. ''Automatic increases are not used too frequently,'' says Ms. Chang at Bankers Trust. ''They take the initiative away from the employer.''
Unless employers seize the initiative and make periodic boosts in retirement checks, pensions are badly eroded by inflation. After seven to nine years, an inflation rate of 8 to 10 percent will cut the buying power of a pension in half , benefit analysts note.
For example, between December 1974 and December 1979, inflation averaged 8.1 percent per year, Chang says. So unless his employer had adjusted pension benefits, someone who had been retired for five years in 1979 would have seen the purchasing power of each pension dollar cut to 68 cents. A pensioner who had been retired 10 years in 1979 found the purchasing power of each pension dollar slashed to 49 cents. And a person retired for 15 years saw this amount cut to 41 cents.
While inflation is a challenge to people on pensions, nevertheless some retirees have better inflation protection than individuals who are still working. The reason: social security benefits are indexed to living costs, while workers' wages often have less inflation protection.
''The average person has more retirement income from social security than from a private pension,'' notes Shapiro. By law, social security benefits are increased each time the consumer price index (CPI) rises by 3 percent or more.
Most retirees have living costs which do not grow as fast as the CPI, because the index includes items, like new homes, which pensioners usually do not purchase. ''If we assume a pensioner's cost of living is growing 2 to 3 percent less than the CPI, which is arguably true, then lower-paid (retired people) are seeing their purchasing power grow,'' says Alden