At Novartis, Pensions Are Out and Cash-Grabbing Is In

Last Updated Jun 21, 2011 8:01 PM EDT

Novartis (NVS) has begun to take for itself hundreds of millions of dollars it normally would have given its employees in pensions due to a complicated change in retiree benefits being rolled out across the company.

In 2009, the company began considering a change from "defined benefit" to a "defined contribution" pension plan. The former pays retirees a guaranteed amount for the rest of their lives; the latter pays a fixed amount during the staffer's employment, but after that the retiree is on his or her own.

The official explanation for the change came after the stock market crash of 2008 and 2009 showed that the markets were too volatile to be trusted with something as important as retirement. The company's pension funds fell below their requirements to fully fund their pensions -- meaning Novartis was liable for the shortfall.

But the unofficial explanation is that this is simply a transfer of wealth from Novartis' employees to the company and its shareholders. The pension change is being rolled out gradually across the company, with its 30,000-member Swiss arm already operating under the new rules. Novartis has about 99,000 employees worldwide.

In 2010, Novartis reported a pre-tax gain of $265 million from the switch:

The accounting consequence of this change in the Swiss pension plan rules results in the Group's consolidated financial statements prepared under IFRS reflecting a net pre-tax curtailment gain of USD 265 million (CHF 283 million) in 2010.
In Q1 2011, Novartis reported that its "net actuarial losses" from funding its pensions had been reduced to just $100,000 after tax, saving the company another $177 million.

These savings are recurring, of course, because a defined contribution plan by definition puts a cap on the company's pension spending. To put it another way, in 2010, the first year of the switch, each employee in the Swiss pension plan lost an average of $8,833.

In the U.S., most companies have already ended their old-fashioned pensions in favor of much cheaper 401(k) plans. Europe is behind the curve on the issue. Companies there compete for employees with their larger state sectors, which often still offer defined benefit pensions. And, generally, Northern European companies like Novartis are rather more patrician in their regard for employees than their ax-happy American counterparts.

That all may be coming to an end, however, as management eyes the extra profits that can be made by stiffing retired workers: A similar thing happened at AstraZeneca last year (AZN), which boosted the company's income by $800 million in Q4 2010.