Most UPS drivers and sorters are members of the Teamsters union, whose contract still includes a pension.
According to the company, the advance notice is aimed at allowing affected non-union employees to plan for the change.
UPS will make contributions to the 401(k) plan of 5 to 8 percent of pay, depending on tenure — in addition to a company match of up to 3 percent.
Retirees already collecting pensions and former employees with vested benefits are not affected.
Unlike a traditional pension, which promises a fixed lifetime payout from a fund managed by the company, a 401(k) plan shifts investment decisions and risks to the employee.
The company said it is making the change because of continued increases in its future pension obligations and volatility that makes it difficult to plan for future costs. The current plan for non-union employees has a deficit of about $6.5 billion.
The move is “not dramatically shifting UPS’s commitment to our employees to provide a strong compensation and benefits package,” UPS spokesman Steve Gaut said. “Really what this is about is stopping the increase in the future liability, so we can have a more predictable and stable expense that UPS will incur for its employee pensions.”
Overall pension costs for UPS increased by $2.6 billion in 2016 compared with 2015, primarily due to charges to reflect changes in the value of its pension plans, according to a company regulatory filing. Accumulated future obligations for all of its pension plans reached $45 billion as of last year, including $25 billion for the plan for non-union employees.
Numerous other companies have also frozen pension plans amid increased liability driven by a large aging population and other factors. Unpredictable interest rates, investment returns and other factors are also contributing to the volatility, according to UPS.
According to UPS, only about 20 of the Fortune 100 companies still have traditional pension plans that are not frozen, and only three still allow new employees to join.
UPS had already closed the non-union pension plan to new employees effective in July 2016, shifting those employees to a 401(k) plan.
And in the fourth quarter of the year, UPS offered some of its former employees buyouts of their pension benefits, with about 22,000 accepting the offer.
Pilots at UPS in 2016 voted to approve a new five-year labor contract with enhanced pension benefits and pay increases.
In 2014, the Teamsters union representing about 268,000 employees at UPS ratified a new labor contract with increased contribution rates for pension benefits as well as wage rate increases.
The Teamsters contract with UPS expires July 31, 2018. It’s yet to be seen how the freeze of pensions for non-union employees might affect future bargaining talks with the Teamsters.
“It’s really far too early to talk about contract negotiations,” Gaut said.
A sampling of big employers that have terminated, frozen or otherwise significantly altered traditional plans in recent years:
Source: Pension Rights Center