Business & Money

Utility companies are at a crossroads when it comes to managing their pension plans. They must determine the best ways to continue to offer this benefit while controlling the impact these plans have on the overall financial health of the organization.

For years, pension plans have been managed in a financial vacuum, held at arm's length from corporate strategy and finances. For a long time, these plans were safe, predictable, and self-funding.

Over the past five years, poor market performance and declining interest rates have turned pension surpluses into deficits. As a result, rising pension costs continue to be a growing problem for the utility sector, with the negative impacts felt in key areas of corporate finance such as cash flow, profitability, and credit ratings.

Competitive Necessity?

While companies in other industries continue to look for ways to freeze or terminate their defined-benefit plans, the majority of companies in the utility sector remain committed to these plans. This is a reflection of the high value their workforce places on defined-benefit pension plans, thus making it a competitive necessity in attracting and retaining employees.

However, more and more publicly traded utilities are saying that higher pension costs have affected corporate earnings. As organizations experience increased scrutiny from credit and equity analysts, pensions have moved up on the corporate agenda. Boards are becoming more actively involved in pension decisions, and many financial executives spend a considerable amount of time on pension plans-potentially distracting them from other business initiatives.