Thursday, July 23, 2009

Are Pension Freezes Effective?

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 ineffective when they freeze pension plans.

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