Citing a need to cut costs, Honda is eliminating its pension for new employees and reducing benefits for the people already with the company.

September 10, 2013

Citing a need to cut costs, Honda is eliminating its pension for new employees and reducing benefits for the people already with the company.

Current employees will retain all of the benefits they have previously accumulated.

Instead of a defined-benefit pension, new employees will be offered a 401(k) savings plan, a version of which has previously been offered as a supplement to the pension. The switch will occur in January.

The changes will "balance associate benefits with what the company needs to secure its future," said Tetsuo Iwamura, Honda's top executive in North America, in a letter to employees obtained by The Dispatch.

Honda has about 13,700 workers in Ohio, most of whom are in central Ohio. It has about 28,000 employees in the United States, plus 4,000 retirees.

The drop in benefits is "a concern for all employees," said one longtime Honda worker who asked that his name not be printed because he was not authorized to speak. "It should be a concern for everyone who's thinking of working there."

Honda is also changing the way it handles early retirement and retiree health insurance, shifting to plans that will provide less-generous benefits.

Jeffrey Smith, a Honda spokesman, said the new retirement plan should be viewed as more of a shift than a reduction in benefits.

The company is holding meetings with employees this month to explain the changes.

Under the current pension, employees receive annual pay equal to 2 percent of the base pay they received during their career with Honda, with adjustments.

With the new system, existing employees' pensions will drop from 2 percent to 1 percent for their remaining years with the company. They also have the option to forgo the 1 percent in favor of a 2 percent to 8 percent company contribution to a 401(k) savings plan.

A pension provides a monthly payment for as long as the employee is alive, while a 401(k) is more like a savings account. In most cases, a pension provides greater benefits.

Honda gave employees examples of how the shift will affect hypothetical workers. For example, under the current system, a 55-year-old employee whose base pay is $50,000 per year and who has 25 years of service could expect to retire at 65 with a pension of $34,176 per year. Under the new system, the same worker's retirement income from Honda would be $23,226 to $28,701 per year, depending on which plan the employee chooses.

The company has been making vehicles in North America since 1979, when it opened its first plant in Marysville. It has been here long enough, and grown enough, that retirement benefits are now a major expense.

At the same time, private-sector employers have been phasing out pension plans. In its message to employees, Honda notes that 13 percent of Fortune 100 companies had defined-benefit pensions as of 2011, down from 89 percent in 1985.

In the past few years, the greatest threat to pensions has been low interest rates, which have forced companies to pump additional money into retirement systems to guarantee the benefits, said Steve Blakely, managing editor at the Employee Benefit Research Institute, a nonpartisan research group in Washington, D.C.

"Companies have seen their pension costs explode," he said. This has led to a financial climate that is "extremely stressful" to employers with pensions, he said.

Honda follows Chrysler, Ford, General Motors and Nissan in moving away from pensions for new employees. Nissan was the first to do so, in 2006. Chrysler, Ford and GM made the changes with unions in contracts in recent years that set up a two-tiered system, with lower pay and benefits for newly hired workers.

Toyota still has a pension for new employees.

The cost cuts by the Big Three U.S. automakers - Chrysler, Ford and GM - have eroded much of the cost advantage that Honda used to have, said Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.

He estimates that Honda pays its employees an average of $50 to $52 per hour in salary and benefits, a level that he says is more than Chrysler and less than Ford, GM and Toyota.

Considering this, and the larger trend away from pensions, he is not surprised by Honda's actions.

"I think the handwriting is on the wall," he said. "The defined benefit is history."