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Pension Plan Freezes Continue at Steady Pace
 

By Stephen Miller  7/24/2009
 

The number of Fortune 1000 firms that have a frozen pension plan increased again in 2009 as companies continue to look for ways to control their retirement benefit expenses, according to an annual analysis by HR consultancy Watson Wyatt.

The analysis found that 190 firms on the 2009 Fortune 1000 list have a frozen defined benefit (DB) pension plan, compared with 169 companies in 2008 and only 45 in 2004. Overall, the rate of DB plan sponsorship in the Fortune 1000 decreased slightly to 61 percent in 2009 from 63 percent in 2004.

The number of Fortune 1000 DB plan sponsors with frozen plans has increased steadily since 2004:

Fortune 1000 list year

Number of DB sponsors

Number of DB sponsors with frozen plans

Percentage of DB plan sponsors with frozen plans

2009

607

190

31.3%

2008

624

169

27.1%

2007

638

138

21.6%

2006

627

113

18.0%

2005

627

71

11.3%

2004

633

45

  7.1%

Source: Watson Wyatt.

Industry Variation

The analysis found that industries with high DB plan sponsorship rates, such as utilities and manufacturing, are less likely to freeze a plan than those with lower sponsorship rates. However, companies in industries that have been affected severely by the economic crisis — the financial services and automobile industries in particular — are exceptions. Almost half of the DB plan sponsors in the financial services industry and one third of the DB plan sponsors in the automobile industry have frozen plans.

“As companies in industries that have suffered through the crisis struggle to keep their heads above water, freezing or closing pension plans may seem like effective ways to cut costs,” says Alan Glickstein, senior retirement consultant at Watson Wyatt. “However, this strategy could come with substantial hidden costs — for employers, who could face increased difficulties in managing the retirement of their workforces, and for employees, who could face reduced retirement resources as a result of a frozen pension plan or a reduced 401(k) match.”

Not Boost for Company Stock

A separate Watson Wyatt analysis found that freezing pensions does not have a positive effect on companies’ market value. The analysis of 82 publicly traded companies that froze or closed their pension plans between 2003 and 2007 found that there is an insignificant or negative impact on stock prices associated with the announcement of a pension freeze or close.

Refuting conclusions of previous research, in 71 out of 82 cases the stock prices of companies did not change significantly in the 23 days around an announcement of retirement plan changes. In the cases where such an announcement did have a statistically significant effect, more often than not the employer’s stock price decreased.

“Freezing a plan may produce some accounting gains, but it will not provide companies with long-term cash flow relief (either absolute level or volatility) for many years,” says Mark Warshawsky, director of retirement research at Watson Wyatt. “Also, even if these freezes do lead to savings, there will be no immediate positive effect on firm value, which could even become diminished in the long run if employees begin to view the firm as an uncompetitive employer in light of its shrinking commitment to retirement and its transfer of risk to employees.”

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Bond Markets Deal Fresh Blow to Underfunded Pensions, SHRM Online Benefits Discipline, July 2009

Milestone: Most Fortune 100 Firms Offer Only 401(k)s to Salaried New Hires, SHRM Online Benefits Discipline, May 2009

Rescuing Pension Plans, HR Magazine, May 2009

Retiring a Defined Benefit Plan: Freeze vs. Terminate, SHRM Online Benefits Discipline, July 2007

How to Weigh Alternatives for Defined Benefit Plans, SHRM Online Comp & Benefits Focus Area, April 2007

Pension Plans: Freeze 'Em and Forget 'Em Is Not a Practical Strategy, SHRM Online Comp & Benefits Focus Area, February 2006

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