According to the announcement, the Harleysville, Pennsylvania-based company had closed its DB plans to new employees hired after April 14, 2006 and intends to freeze the plans for its remaining employees when their collective bargaining agreement is renegotiated in 2007. The company intends to replace the DB plans with an enhanced defined contribution program for all salaried and non-union hourly employees effective December 31, 2006.
Raymond DeHont, the CEO, said in the announcement that DB benefits already earned will be preserved and the move will provide more predictable cost for the company. The move is expected to reduce the company’s annual pension expense by $500,000, net of increased contributions to its DC plan.
The decision to switch from DB to DC plan offerings has been increasing in the past year. Some studies have indicated that pension reform will cause even more companies to make the switch (See Poll: Pension Reform Will Contribute to Plan Terminations ). The Pension Protection Act of 2006 was passed in August and the Financial Accounting Standards Board recently issued regulations requiring companies to report pension and other post-employment benefit obligations on their balance sheets.
Studies from Mellon Financial (See Study: Pension Freeze is Not Total Answer ) and SEI (See Study Warns DB Plan Freezing Doesn’t Mitigate All Risks ) warn that pension plan freezes may not be the cure-all for pension risks and may even put companies at greater risk. SEI suggests comprehensive plan design studies before companies make the decision to close DB plans (See SEI: Consider Investment Management Before Closing DB Plan ), while a research paper from Towers Perrin provides a number of other options for plan sponsors to consider (See The Case for Freezing Pension Plans ).