Guest Post: Are Pension Freezes Effective?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Nearly a third of the pension plans offered by Fortune 1,000 firms are now frozen, according to a report from Watson Wyatt.

Though the rate at which companies are freezing plans has dropped since the peak year in 2006, the 190 plans now locked down represent a 12% increase from a year ago.

Companies in industries that have been hardest hit by the economic downturn have higher freeze rates. Among them are financial services and auto industry employers, according to Watson Wyatt.

“We think it’s a short-sighted move that definitely hurts employees,” says Nancy Hwa, spokeswoman for the Pension Rights Center. “But it’s not surprising, given the way the economy is going.”

Pension freezes are a relatively new corporate development.”If a company is literally fighting for its survival, it’s more likely to pull out all stops,” says Alan Glickstein, senior retirement consultant at Watson Wyatt. “And that might include freezing a plan because they can pick up some savings.”

The percentage of pension plan freezes has steadily risen since 2004, when only 7.1% of Fortune 1,000 firms had taken that step. But the largest percentage increase occurred in 2006 and not during the current recession.

“The biggest surprise is that we haven’t seen a huge surge,” Glickstein says. The rate of freezes might be slowing as companies realize that the freeze does not provide much of a reduction in retirement costs, the report says.

Although there are different types of pension freezes, companies generally close the plan to new hires. And they bar existing employees from earning any more benefits. But by freezing the plan, employers do not cut or slash the benefits that already have been earned. And after freezing a pension, companies often increase their 401(k) matching contributions or take other steps to partially offset that pension reductions,
Glickstein says.

Companies also have found that pension freezes have had an insignificant or negative impact on stock prices, according to a separate Watson Wyatt report.

It’s unclear if companies that have frozen plans will eventually unfreeze them. So far, that has been rare.

As I have mentioned before, companies that maintain their pension plans will attract and maintain good employees and likely enhance productivity. Unfortunately, the shortsighted attempt to cut costs will prove innefective when they freeze pension plans.
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One comment

  1. Greg

    One of the least painful ways for an organization to rip-off employees for big bucks is to convert a defined-benefit pension to defined contribution plan (401K, 403B, 457,…). The cash amount converted for each employee is often calculated by assuming the employee retires on the conversion date and determining the value of the defined benefit pension as of that date. Those life employees with 10-20 years of service at the conversion typically get a substantially reduced benefits compared to what they would have had with either the old pension system or the defined contribution system w/o conversion.

    Surprisingly, these conversions are often not challenged by employees – most just don't have the knowledge needed to see how much a pension conversion reduces their retirement benefits.

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