Employees lose when pensions are frozen, even if DC plan ups contributions

Companies that freeze their pension plans end up saving money even when they increase their contributions to a defined contribution plan for their employees, according to a University of Michigan report.

Employees, on the other hand, see a decrease in the net present value of their retirement benefits.

According to the authors of “Cost Shifting and the Freezing of Corporate Pension Plans,” employees received only partial compensation for their lost defined benefit pension accruals.

When a pension plan is hard frozen, the assets in the plan cease to grow with future work or pay increases. This report shows that although companies with frozen plans attempt to make up that shortfall by filtering employees into a defined contribution plan, the benefit falls short of what their pension would have provided.

The report found that net of the increase in total defined contribution plan contributions, companies saved between 2.7 percent and 3.6 percent of payroll per year, and over 10 years, they saved 3.1 percent of total firm assets.

As of 2011, 40 percent of defined benefit pension plan sponsors in the Fortune 1000 had at least one frozen plan.

The report also found that the competitiveness of the marketplace affected whether a company made money from freezing its defined benefit plan. In a competitive market, companies that froze their pension benefits didn’t save money for their firms or reduce total compensation for their workers. Workers instead received contributions to their defined contribution plans that offset the loss of their defined benefit accruals, or they demanded and received offsetting wage increases.

The authors concluded that the probability that a firm will freeze its pension plan is positively related to the value of new contributions and earnings into the plan as a share of firm assets.

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