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AstraZeneca Boosts Profit By Axing $800M in Retirement Benefits

AstraZeneca (AZN)'s Q4 earnings got a boost from nearly $800 million in cuts to employees' retirement and pension plans. Revenue at AZ sank 4 percent to $8.6 billion but net income was up 59 percent to $1.8 billion. The company achieved that counterintuitive result in part by switching employees from "defined benefit" retirement plans to "defined contribution" plans. The former pay retirees a guaranteed amount for the rest of their lives; the latter pay a fixed amount during the staffer's employment but after that the retiree is on his or her own.

The company said:

As previously disclosed, on 28 January 2010, the Group announced proposals regarding changes affecting its UK pension arrangements, including a freeze on pensionable pay for members of the defined benefit sections of the UK Fund with effect from 30 June 2010. This modification, as well as changes made to benefits under other post-retirement benefit plans, has resulted in gains of $791 million being recognised in operating profit in the fourth quarter of 2010.
The pensions grab -- which largely affects employees in U.K. -- was met with cynicism by one analyst:
There are 3 reasons why you may want to cream off your UK pension fund. You could have outperformed and so there was too much money in it. You could simply be doing a Robert Maxwell, though I am sure no-one at Astra would be so dastardly, or thirdly you could plan to sack so many employees early that they will never need pensions from you anyway. If there's a 4th reason maybe you can tell me?
The massive savings for AZ also shed some light on exactly how much money the company's employees lost when they ended their unsuccessful strike last year. The cuts reduced AZ's retirement benefit obligations by $882 million to $2.5 billion, the company reported. That should help the $3.4 billion pension deficit the company recorded in 2009 (2010 numbers not yet available).

The cuts appear to be doing exactly what CEO David Brennan said they would, which is make the company more efficient. Here's a chart showing how much the company earns in revenues for every $1 invested in its staffing costs (using sales, general and admin expenses as a proxy for staffing). That big jump in productivity in Q4 2010 occurred just as AZ realized the $791 million pension savings:


Image by Flickr users Darren and Brad, CC.