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Bethesda, MD-based prime defense contractor Lockheed Martin Corp. (LMT - Analyst Report) 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 financial results.

Another defense giant The Boeing Co. (BA - Analyst Report) 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 Embraer SA (ERJ - Analyst Report) and General Dynamics Corp. (GD - Analyst Report).

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