Available Studies on Plan Freezes
Available Studies on Plan Freezes
The decline in the equities markets starting in 2000 and the continued longer-term decline in interest rates have combined with other factors to reduce funding levels in many plans. A number of these plans have become so underfunded that their sponsors are required to make relatively high minimum contributions to bring funding back up to acceptable levels. Reports from benefit consulting firms suggest that the sponsors of many underfunded plans would like to terminate their plans but cannot afford to purchase annuities from a private-sector insurer to cover benefits. These reports also indicate that many sponsors have taken actions, or are thinking about taking actions, to reduce the burdens of their plans by closing them to new entrants or freezing accruals for some or all active participants.
A number of benefit consulting firms and actuarial organizations conducted studies from 2003 through 2005 that touched on the frozen plan issue. These studies all have shortcomings, however. Those conducted by the consulting firms are generally based solely on a review of plans serviced by the consultant. Those by the actuarial organizations are more broadly based but response rates are low and respondents are self-selected.
None of the studies are based on a random sample of all plans or on data available from all plans. This means the results cannot be projected to the entire population of plans or to the plans insured by PBGC. In addition, the definition of "freeze" varies across these studies, and, when reporting results, the studies tend to combine frozen plans with plans with other characteristics such as plans whose sponsors are considering a freeze or plans that have terminated. This makes it difficult to determine how many plans were frozen at a point in time and difficult to compare the results of the various studies. Also, the studies do not report why the freeze was implemented.
The most often cited study of frozen plans was released by the Aon Corporation in the fall of 2003.1 Aon's actuaries looked at more than 1,000 private-sector defined benefit client plans and found that 15 percent of the plans were frozen to one degree or another. It also reported that the sponsors of another 6 percent of plans were actively considering freezing their plan. Neither the level of freeze nor the year the freeze was implemented was specified for the plans that were frozen, and there has been no published follow-up to determine if the sponsors who were considering freezing their plans actually did so.2
In January 2004, Mercer Human Resources Consulting reported the results of a study that looked at changes in plan characteristics over the past three years for 170 client plans.3 The study found that 6.5 percent of the plans had been frozen during the previous three years, 6 percent had been closed to new entrants, 9 percent would be frozen within the following six months, and a freeze was under consideration by another 6 percent. The study did not report on the extent of the freeze for the frozen plans or how many plans might have been frozen before the 3-year look-back period. Again, there has been no follow-up report on whether the planned freezes actually occurred.
In 2003, the American Academy of Actuaries asked its members to report on the extent of freezes in client plans.4 The Academy received voluntary responses from 232 Enrolled Actuaries who worked on 4,659 mostly small plans. Of these plans, 9 percent were frozen prior to 2000, 11 percent since 2000 and 7 percent were closed to new entrants. Sponsors of 8 percent were considering freezing their plans. The extent of the freeze was not reported.
Towers Perrin conducted studies in 2003 and 2004 that included questions about plan freezes, but the Towers analysts combined frozen plans with plans having other characteristics when reporting their results.5 In the 2003 study, for example, they reported that 27 percent of sponsors had either frozen their plan, were considering freezing their plan, or had either reduced plan benefits or were planning to reduce benefits. The 2004 benefits study of 134 leading multinational corporations (only 42 percent of which were headquartered in North America) found that 20 percent had frozen or eliminated their pension plans and 12 percent expected to take one of these two actions within the next 12 to 18 months.
Hewitt Associates looked at the plans of about 200 large companies in 2003 and 2004.6 However, the focus of the studies was on companies that were considering freezing their plans or closing them to new entrants. The Hewitt studies did not report the percentage of plans that had already been frozen.
In March 2005, the Society of Actuaries published the results of a survey conducted for them by Mathew Greenwald and Associates in September 2004.7 The survey, which was sent to the 2,500 employers in the United States with the largest work forces, contained some information on plan freezes. Only 342 employers responded and 100 of these were public sector organizations. Of these 342 employers, 264 sponsored one or more defined benefit pension plans. Seventy of the sponsors (27 percent) had frozen at least one plan.8 However, 66 of these 70 employers continued to sponsor at least one ongoing defined benefit plan. The study did not differentiate between frozen plans in the private versus public sector. It reported that 5 percent of the active participants in the private-sector plans and 3 percent of those in the public-sector plans were in plans that had been frozen.
More recently, Watson Wyatt released the results of a study on the status of defined benefit plans in the Fortune 1000 companies for 2001 through 2004.9 The study found that the percentage of companies with a frozen or terminated plan increased from 5 percent (34 plans) in 2001 to 11 percent (71 plans) in 2004. The study did not indicate (1) how this percentage was distributed between frozen and terminated plans; (2) when the frozen plans were frozen; (3) what type of freeze was being measured; or (4) whether all, or just some, of the plans of an individual company were frozen or terminated.
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1. Aon press release, "Aon Study: Pension plan freezes moving to forefront; more possible without changes to funding rules," October 29, 2003.
2. Aon is conducting a follow-up study but is still gathering data at this time.
3. Mercer Human Resources Consulting, "Coping with the Economy: Survey on retirement programs," no date but cited in a Mercer Investment Consulting press release, "US employers look to reduce retirement plan costs," January 22, 2004.
4. American Academy of Actuaries, Enrolled Actuaries Report, "GAO Studies Frozen Plans," pages 5-6, Spring 2004.
5. Towers Perrin HR Services, "Back to the Future: Redefining Retirement in the 21 Century, The 2003st Retirement Study" and "Managing Employee Benefits Globally: Today's increasingly disciplined approach," Worldwide Benefits Management Survey, November 2004.
6. Hewitt Associates LLC, "Survey Findings—Current Retirement Plan Challenges: Employer Perspectives, 2003," December 2003, and "Survey Findings: Hot Topics in Retirement, 2005," January 2005.
7. Mathew Greenwald and Associates, Inc., "Society of Actuaries' Survey on the Prevalence of Traditional and Hybrid Defined Benefit Pension Plans: Report of Findings," March 2005.
8. The freeze definition used was a "hard freeze."
9. Watson Wyatt Worldwide press release, "More Companies Froze, Terminated Pension Plans in 2004, Watson Wyatt Analysis Finds," June 22, 2005.