Bethesda, MD-based prime defense contractor
Lockheed Martin Corp.
) announced that it will freeze its defined benefit pension plan
and move active salaried workers to an enhanced
defined-contribution program. This will not only enable the defense
major to manage the rising costs of its retirement programs, but
will also limit long-term liabilities.
Under a two-phase transition plan, starting on Jan 1, 2016,
pay-based pension benefits will be frozen first, followed by
service-based benefits. Pay-based benefits will be frozen on Jan 1,
2016 and service-based benefits will follow suit on Jan 1, 2020.
Hence, by Jan 1, 2020, Lockheed Martin's current service-based
benefits will be terminated.
The new 401(k) retirement plans will offer employees up to 10% of
their salary in company contributions each year. This move not only
helps to retain skillful talent at the company, but also helps in
reducing long-term costs.
The Pentagon repays defense contractors a certain portion of their
workers' pension costs tied to work that was done for military
programs. The defense companies had to wait for years for the
funds, but last year's new accounting regulations are expected to
speed up the pace of those compensations. The new rules will
certainly give a boost to the cash flow of these companies, thereby
helping to drive earnings in a currently tepid budget scenario
where the top line is constantly under pressure.
We note that Lockheed started to phase out its traditional pension
program in 2006. The U.S. pension fund was also closed to new hires
then. Lockheed Martin said 48,000 out of 113,000 total employees
are still enrolled in the program. It also comprises 250,000
retirees and former employees.
Last year, Lockheed Martin exhausted $2.25 billion in cash for its
worldwide defined benefit plans. In Jan 2014, the company announced
that it expects to contribute $1 billion in 2014.
The maker of the world's most expensive weapons system - the F-35
Joint Strike Fighter - Lockheed expects to update full-year
estimates for pension expense in its second quarter 2014 earnings
report, which is slated to be released on Jul 22. The company does
not expect the pension-freeze plan to affect its second-quarter
Another defense giant
The Boeing Co.
) had disclosed a similar move in March. Boeing said that it would
freeze the pension benefits of almost 70,000 of its non-union
employees and move them to 401(k) plans starting 2016. These
changes to the retirement program have largely been triggered by
varying workforce demographics, better life expectancy as well as
historically low interest rates that extensively increased pension
liabilities in 2014.
Although Lockheed Martin's latest move will not drastically
accelerate cost savings for the company until after 2020, but will
help in managing costs that is the key for remaining competitive in
the long run.
Lockheed Martin carries a Zacks Rank #2 (Buy). Other similar ranked
defense players include
General Dynamics Corp.
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