Study: Freeze the Pension Plan, Hurt Your Company’s Bottom Line

Almost a third of Fortune 1000 firms have frozen pension plans, but it generally didn’t enhance the company’s market value

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The decline in companies offering traditional pensions to retirees hit a new milestone this year. Almost a third of Fortune 1000 companies have now frozen this often valuable retirement benefit. Some 190 companies on the 2009 Fortune 1000 list now have frozen their pension plan, up from 169 companies last year and just 45 companies in 2004. Generally, employees can keep what they have already earned, but won’t accrue additional retirement benefits in the plan. New hires are also generally prohibited from signing up.

Industries that have been severely affected by the recession were the most likely to put their pension plans on ice. Almost half of companies in the financial services industry and a third of automobile firms have frozen their pension plans. Fortune 1000 companies in the retail, communications, and food and beverage sectors also had a large increase in the number of frozen pension plans since last year.

Utility companies were the most likely to maintain their retirement benefits, with 95 percent still offering traditional pension benefits to new and existing employees. Other industries within the Fortune 1000 likely to offer a non-frozen pension plan are food and beverage (86 percent), aerospace and defense (86 percent), pharmaceuticals (82 percent), and insurance (82 percent).

Many companies freeze their pension plans in an effort to get retirement benefit expenses under control. Companies that halted their retirement plans significantly reduced net pension expenses from $72 million in fiscal 2003 to an average of about $3.6 million in 2008, Watson Wyatt found.

But a separate Watson Wyatt study found that freezing pensions generally didn’t enhance the company’s market value. The announcement of a pension freeze or close had either an insignificant or negative impact on stock prices, according to Watson Wyatt’s analysis of 82 publicly-traded companies that froze or closed their pension plans between 2003 and 2007. “Even if these freezes do lead to savings, there will be no immediate positive effect on firm value, which could even become diminished in the long run if employees begin to view the firm as an uncompetitive employer in light of its shrinking commitment to retirement and its transfer of risk to employees,” says Mark Warshawsky, director of retirement research at Watson Wyatt.

In 71 of the 82 companies that froze their pension plans, the stock prices of the company did not change significantly within 23 days of the announcement. When the announcement did have an impact, typically the employer’s stock price decreased.

For more information, see:

  • Suspending the 401(k) Match, Keeping a Pension
  • Protecting Your Retirement if Your Employer Goes Bankrupt
  • Jobs That Still Offer Traditional Pensions