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from Spencer’s Benefits Reports: More than one-fourth of the 48 companies with “hard frozen” plans (those with no future accruals) surveyed by Aon Consulting are contemplating the termination of their plan. The top five reasons, in order, for terminating a nonunion hard frozen plan, or terminating or moving a “soft frozen” plan (those with no new participants) to hard frozen status, were (1) the financial volatility is unacceptable; (2) the cost of the plan is too great; (3) administrative time and expenses are too great; (4) employees do not appreciate the plan; and (5) the company does not want employees working side by side with different benefits.
Aon Consulting had 66 companies with more than 100 frozen defined benefit plans respond to its Ready 2012 Pension Pulse Survey in January 2009. The companies were located in all regions of the country and the frozen plans had assets ranging from $25 million to more than $10 billion. Both hard frozen plans and soft frozen plans were included in the survey.
More than two-thirds of the companies with frozen plans said that no changes were necessary to the design of the plan, the investment strategy, or the funding required to maintain the plan after the plan was frozen. Half of those companies decided not to make changes after investigating the need for change. Of the remaining companies, 13% changed their funding strategy, 12% changed their investment strategy, and 3% changed the design of the plan.
Despite being frozen, 86% of the plans require future cash contributions to the plan; 14% of the plans were overfunded and did not require contributions. Of the 86% of plans, 60% will make plan contributions from internal corporate returns or existing cash, 12% will make cuts in their business, 9% will borrow the money, and 5% will seek a funding waiver. When a company indicated that it expected to cut its business to pay the contribution, Aon found that future hiring (30%), marketing (12%), training (8%), and research and development (5%) were the most likely areas to be cut, but 45% did not know where the cuts would be made.
Two-thirds of the companies with frozen plans have continued to maintain a standard asset mix of 60% stocks, 30% fixed income, and 10% “other,” but less than 5% of the companies plan to continue that allocation. Future investment strategies include use of swaps and derivatives (35%), reflection of a short-term horizon to plan termination (27%), use of a higher than 60% allocation to equities (14%), and use of higher than 30% bond exposure to partially immunize the risk (14%).
Aon noted that “while it is true that a significant number of companies have frozen their defined benefit plans within the past three years, the majority of plan sponsors retained their plans without a freeze. The choice of whether or not to retain or freeze the plan should be based on whether or not the plan meets sponsor and employee needs, and whether or not its risks can be acceptably addressed.”
For more information, visit http://insight.aon.com/?elqPURLPage=3764.
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