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Why are Healthy Employers Freezing Their Pensions?

13 Pages Posted: 15 Jun 2006  

Mauricio Soto

International Monetary Fund (IMF)

Alicia H. Munnell

Boston College - Center for Retirement Research

Francesca Golub-Sass

Boston College - Center For Retirement Research (CRR)

Francis M. Vitagliano

Boston College - Center for Retirement Research

Date Written: March 2006

Abstract

The shift in pension coverage from defined benefit plans to 401(k)s has been underway since 1981. This shift is the result of three developments: 1) the addition of 401(k) provisions to existing thrift and profit sharing plans; 2) a surge of new 401(k) plan formation in the 1980s; and 3) the virtual halt in the formation of new defined benefit plans. A conversion from a defined benefit plan to a 401(k) plan was an extremely rare event, particularly among large plans. Historically, the only companies closing their defined benefit pension plans were facing bankruptcy or struggling to stay alive. Now the pension landscape has changed. Today, large healthy companies are either closing their defined benefit plan to new entrants or ending pension accruals for current as well as future employees. Why are healthy employers taking this action? And why now?

This brief reviews the major pension freezes during the last two years and explores the impact on employees at different stages in their careers. It then offers four possible explanations why employers are shutting down their plans. The first is that some U.S. companies are cutting pensions to reduce workers' total compensation in the face of intense global competition. The second explanation is that employers have been forced to cut back on pensions in the face of growing health benefits to maintain existing compensation levels. The third explanation, by contrast, points to the finances of the plans themselves - specifically, their market risk, longevity risk, and regulatory risk that make defined benefit pensions unattractive to employers. The final explanation is that with the enormous growth in CEO compensation, traditional qualified pensions have become irrelevant to upper management who now receive virtually all their retirement benefits through non-qualified plans. Each of these explanations contains a kernel of truth, and they all help explain the current trends.

Keywords: defined benefit plans, pensions, 401(k), pension freezes, pension coverage, company, defined contribution plans, risk, compensation, employee benefits, benefits

JEL Classification: A10, E24, G23, G28, G31, G31, G33, G34, G35, G38

Suggested Citation

Soto, Mauricio and Munnell, Alicia H. and Golub-Sass, Francesca and Vitagliano, Francis M., Why are Healthy Employers Freezing Their Pensions? (March 2006). Available at SSRN: https://ssrn.com/abstract=893214 or http://dx.doi.org/10.2139/ssrn.893214

Mauricio Soto (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alicia Munnell

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Francesca Golub-Sass

Boston College - Center For Retirement Research (CRR) ( email )

Chestnut Hill, MA 02167
United States

Francis M. Vitagliano

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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