Pension Cuts Loom at More Small Banks

For bankers who are turning over every stone possible to cut costs, here's another idea: shut down your old-fashioned pension plans.

Since November of last year, large banks like Bank of America (BAC) and SunTrust Banks (STI) have frozen pensions, halting the accrual of additional benefits for the employees who participate in the plans. A community bank followed suit last month, when $2 billion-asset Rockville Financial (RCKB) of Connecticut froze its pension.

The number of companies that still offer pensions continues to fall nationwide as employers look to cut costs. Instead, companies are leaning on defined-contribution plans.

Pensions have "been declining steadily for years," says Greg Charleston, a senior managing director at financial consulting firm Conway MacKenzie.

The main problem with traditional defined benefit pensions is that "the company is responsible for pension benefits that may be 40 to 50 years in the future," Charleston says. That situation leaves the company exposed to risks outside its control, such as the performance of the stock and bond markets. By shifting to a 401(k) plan, the risks "will be borne by the employee" instead of the company, he says.

Other community banks that have frozen pensions in the past two years include $1.1 billion-asset Eastern Virginia Bankshares (EVBS) and $8.4 billion-asset National Penn Bancshares (NPBC).

Some banks have taken steps even more drastic. The $1.7 billion-asset MidWestOne Financial Group in Iowa City liquidated its pension in July, paying out all benefits due participants, then closing the plan.

Many banks that allow their pensions to continue to accrue benefits may seek to follow Rockville's lead, especially as artificially low interest rates increase the cost of maintaining a pension plan. About 100 banks that trade on major stock exchanges reported having pension liabilities as of Sept. 30, says Frank Schiraldi, an analyst at Sandler O'Neill & Partners.

It's likely that many of these banks will shut down their defined-benefit pension plans within the next decade, Charleston says.

"The defined-benefit plan is on the verge of extinction," Charleston says.

Rockville simply could not afford to continue the plan, says Bill Crawford, president and chief executive. The cost of maintaining the plan tripled from $700,000 in 2006 to an estimated $2.1 million in 2013.

"We couldn't justify this thing from a shareholder perspective," Crawford says. "We were able to take a lot of volatility out of our earnings and equity by capping this."

The move will save the company $1.1 million next year, a figure that will increase over time, the company said in an Oct. 24 regulatory filing. It will also boost other comprehensive income by about $1.5 million this year, and that figure should also improve "as the future pension liability is now capped," the company said in the filing.

The $1.1 million yearly savings for Rockville equates to 3 cents per share on its earnings, Schiraldi says.

Rockville's pension had 188 participants and $20.8 million of assets, as of Dec. 31, according to the company's tax documents. Rockville had already closed the pension to new employees, in January 2005. The plan will continue to pay benefits to participants.

To compensate employees who have assets in the pension, Rockville will make a "transition contribution" to their 401(k) plans. Rockville also offers an employee stock ownership plan, which it established when it converted from a mutual thrift to stock-owned company, Crawford says.

Even with the ESOP and the supplemental 401(k) contribution, Rockville and other banks that freeze pensions do a disservice to employees, says Nancy Hwa, a spokeswoman at the Pension Rights Center in Washington. Pensions offer guaranteed monthly income in retirement. Freezing pensions also has an outsized effect on older employees, she says.

"They'll have less time to save in a 401(k) what they could have earned in pension benefits," Hwa says.