ExxonMobil is Cutting Costs. Will a Pension Freeze be Next?

ExxonMobil and the majority of other oil firms are currently attempting to reduce expenses in order to assist in addressing the economic decline caused by the coronavirus. The oil and gas sector was particularly heavily hit by the pandemic, although the overall economy was negatively impacted. Some businesses have decided to try and cut labor expenses by conducting layoffs, such as Chevron. "Chop 10% to 15% of its worldwide workforce as part of an ongoing restructuring at the second-largest U.S. oil producer," Chevron has announced, according to Reuters. Instead, some oil firms, such as ExxonMobil, have decided to reduce benefits. It had been stated by ExxonMobil that it would no longer match employee contributions to their retirement savings accounts. Furthermore, a recent piece published in Business Insider stated that layoffs at ExxonMobil would be announced soon.

Will conventional cost-cutting methods, however, be sufficient? Is a freeze on pensions ExxonMobil's next move?

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In the past, companies have found success in preserving cash by freezing their pension programs. In 2005, Verizon put a freeze on their pension. As an alternative, they provided workers with an improvement over the 401(k) programs that had been in place since 2006. At the time, ABC reported that Verizon planned to convert from a defined benefit (DB) pension plan to an upgraded 401(k) plan in order to save $3 billion over a ten-year period.

There has been a growing economic trend in which corporations are attempting to move away from Defined-Benefit (DB) plans & move toward Defined Contribution (DC) plans. The total number of corporate pension plans has steadily declined since the early 1980’s. AARP has stated that “The number of corporate pension plans with 100 or more members has fallen from almost 26,000 in 1983, the peak, to about 8,400 in 2016…That’s a drop of two-thirds in about 35 years.' On top of that, Barron’s reported that, about 60% of the $28 trillion in U.S. retirement assets are found in defined contribution (DC) plans. In the year 2000, when many more companies offered DB plans, that number was under 50%. It’s becoming less common for an employee to work at the same company for 30 years and retire with a nice pension. In an effort to better control the amount of their present pension commitments, many companies are offloading or freezing their defined benefit pension plans. When employees enroll in a DC plan, the "corporate pension plan stops accruing new benefits as workers age and salaries rise," according to Barron's.

Barron's lists a number of businesses, including General Electric and Lockheed Martin, who have chosen to freeze their defined-benefit pension plans as of late. General Electric has offered 100,000 former employees a buyout option for current retirees and is frozen the pensions of 20,700 employees. Another cost-cutting strategy used by organizations is the buyout option. The Retirement Group claims that defined benefit (DB) plans, which give retirees a lifetime monthly payout, frequently result in significant pension liabilities for the employer. But "corporations could take the defined-benefit off their books by offering both workers and retirees a lump sum." This has the potential to transfer risk from the company to its employees for businesses such as ExxonMobil.

In general, this trend benefits investors because it lowers the risk of investing in companies who are able to reduce their debt. For employees, who frequently depend on those benefits for their retirement years, losing DB plans is a terrible thing. A pension freeze usually has the greatest negative impact on workers who are in the middle to end of their careers. It should be noted that ExxonMobil currently provides one of the greatest benefit packages of any business in the nation. Asking your HR department for an estimate of your pension benefits following retirement is a smart idea if your pension is frozen. ARRP advises requesting estimates for both your monthly payments and lump-sum payment. It's a good idea to find out how much your spouse would get in the event of your death.
Sources:

- Khan, Shariq. “Exclusive: Chevron to Cut up to 15% of Staff amid Restructuring – Reuters.” U.S., Reuters, 27 May 2020, https://www.reuters.com/article/us-chevron-layoffs-exclusive/exclusive-chevron-to-cut-up-to-15-of-staff-amid-restructuring-idUSKBN2332P3.

- Noe, Eric. “After Verizon, Are Pension Freezes on the Way? – ABC News.” ABC News, ABC News, 16 Dec. 2005, https://abcnews.go.com/Business/story?id=1378711.

- “The Retirement/Transition Guide for ExxonMobil Employees.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://energy.theretirementgroup.com/conoco-phillips-educate

- “Insider Energy: Exxon Layoffs to Come, Election Consequences – Business Insider.” Business Insider, Business Insider, 23 Oct. 2020, https://www.businessinsider.com/insider-energy-exxon-layoffs-to-come-election-consequences-2020-10#:~:text=Exxon%20could%20soon%20announce%20US,potential%20job%20cuts%20shortly%20after

- “Pension Lump-Sum Payment Windows Are Back.” The Retirement Group, The Retirement Group, 11 Aug. 2020, https://retirekit.theretirementgroup.com/pension-lump-sum-payment-windows-are-back-e-brochure

- Root, Al. “Pension Plans Continue to Fade Away. Why That Brings New Worries.” Barron’s | Financial and Investment News, Barrons, 11 May 2020, https://www.barrons.com/articles/pension-plans-continue-to-fade-away-why-that-brings-new-worries-51589199204.

- Waggoner, John. “What to Do If Your Pension Is Frozen.” AARP, 16 Oct. 2019, https://www.aarp.org/retirement/planning-for-retirement/info-2019/pension-plan-freeze.html#:~:text=Other%20major%20companies%20that%20recently,be%20a%20big%20financial%20hit.

- Gross, Elana. “ExxonMobil Reportedly Changed Its Employee Review Process To Increase Performance-Related Job Cuts.” Forbes, 24 July 2020.

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