Despite the recession, the number of big companies with frozen pension plans has followed a recent pattern by only inching up over the past year. A study by consulting firm Watson Wyatt shows that, among 607 Fortune 1000 companies that currently sponsor defined-benefit plans, 31% have at least one frozen plan.
That percentage has climbed about four or five points annually over the past several years, from 7% in 2004 to 27% in 2008. This time, though, the small incremental uptick came as something of a surprise. “With the economy the way it is, we thought there would be a big blip, but instead it was a continuation of a pretty steady pace,” says Alan Glickstein, senior retirement consultant for Watson Wyatt.
One reason for this year’s slow rate of plan freezes could be that some companies are realizing that the cost savings from such a move can be underwhelming.
Watson Wyatt looked at the 365 plan sponsors that have been in the Fortune 1000 in all six years since the consulting firm began doing its annual study on frozen plans. It found that, indeed, the average annual pension expense (not including contributions to cover funding shortfalls) was $73 million in 2008 for companies with active plans, but only $27 million for those that had frozen plans. However, the vast majority of those savings was eaten up by corresponding increases to defined-contribution plans. The average DC expense for companies that ended up freezing plans in 2004 or later went from $45 million in 2003 to $84 million in 2008 — 88% more.
“Freezing a pension plan by itself is not going to dramatically improve your cost structure,” says Glickstein. “Few companies can freeze a plan and not have to replace it with something else, like a richer 401(k) match.”
Not that freezing pension plans and boosting 401(k) matches always go hand in hand. The Employee Benefit Research Institute recently studied 251 defined contribution plan sponsors that suspended their employer match features. Among that group’s 4.4 million aggregate employees, 16% worked for companies that were obliged to fund frozen plans that didn’t have enough assets to cover their liabilities.
Even the savings that are realized from a frozen plan may not be worth the less quantifiable but still costly difficulty the plan sponsor may encounter in managing retirements in its workforce. If the amount of their benefit does not continue to grow, some employees will end up delaying retirement, notes Glickstein. That can create roadblocks, real or perceived, to advancement for other employees. “It starts to gum up the works in terms of orderly succession planning, morale, and productivity,” he says.
Of far greater concern to companies these days than the opportunity to save some small change by freezing pension plans, Glickstein points out, are the devastating losses suffered on the plans’ investment portfolios. Contributions to cover funding shortfalls can be many times more than what could be saved by freezing a plan. “The pain plan sponsors are feeling now stays, whether they freeze their plan or not,” he says.
Further, according to a separate Watson Wyatt study, there is no evidence that, on the average, companies experience stock-price increases after freezing pension plans. In fact, the opposite is true, the consultant said; equity values more often drop after such an announcement.
Meanwhile, looking at plan freezes by industry, the automobile and manufacturing sectors stand out as ones where there are high percentages of both companies that have defined-benefit plans (88% and 84%, respectively) and those that have frozen plans (33% and 28%). In the wholesale business, where 63% of companies have plans, half have frozen them. Other high plan-freezing rates are in financial services (49%), communications (43%), professional and business services (42%), and transportation (40%) industries.
The industry with the fewest plan freezings is utilities, where 95% of companies have a defined-benefit plan but only 5% have frozen it. Other companies with low frozen-plan rates are insurance (18%) and health care (20%).
Watson Wyatt explains that “freezing” a pension plan typically means that although the plan is retained, employees’ future earnings or years of service, or both, are disregarded in calculating their retirement benefits. New employees usually have no access to the plan.