Freeze Pensions While Protecting Employees' Futures

Key points

• Make sure you really need to freeze pensions and can’t solve your current financial difficulty with an alternative solution
• If a freeze is necessary, explore other ways to make your employees feel financially secure
• Approach your pension freeze in a methodical way
• Remember that freezing pensions doesn’t mean you can leave them in the past completely

Reasons to freeze pensions

For decades, defined benefit retirement plans such as pensions have given way to defined contribution plans, most commonly the 401(k). Even multiemployer plans, where pensions remain relatively popular, face pressures that make defined benefit plans tough to maintain.

Most of the reasons for freezing a pension plan boil down to cost — either the annual funding requirements or the administrative costs of the plan have grown too expensive to continue. Freezing pensions reduces that cost by eliminating future benefits not yet earned by participants.

Freezing pensions isn’t an all-or-nothing action. Depending on what’s right for your organization, you might want to consider:

A complete freeze, which essentially stops all plan participants from earning any additional benefits. Participants only receive the benefits they’ve earned up to the point of the freeze.

A partial freeze, where future benefits are frozen for only some employees but not for the entire workforce. This may make sense if you can afford to maintain the pension for current employees, but can’t accommodate new employees entering the pension plan.

No matter the scope of your pension freeze, you’re taking away a benefit from employees. Consider exploring alternative ways to reduce pension plan costs and risks, such as offering former employees lump-sum payments in lieu of future pension benefits or transferring current payment obligations to an insurer.

How to freeze pensions responsibly

Freezing a pension doesn’t absolve you from all responsibilities connected to that plan. You’re legally obligated to continue to fund any benefits participants have earned up to the freeze, and you still must pay annual premiums to the Pension Benefit Guaranty Corporation (PBGC). You also have to comply with the reporting and disclosure standards outlined in the Employee Retirement Income Security Act of 1974 (ERISA).

With all this in mind, you should ask if your organization has:

• Determined the curtailment accounting impact for the freeze year?
• Calculated final accrued benefits for impacted participants as of the freeze date?
• Conducted nondiscrimination testing by the plan’s effective freeze date?
• Reevaluated the plan’s investment strategy for changes in expected future benefit payments?

Another major component to responsibly freezing pensions involves making your participants feel financially secure, despite having taken away a major benefit. Pairing the pension freeze with the announcement of a debt management program, for example, could help lessen the blow to workforce morale (and subsequently, productivity and retention).