DB Freezes Continue

September 13, 2010 (PLANSPONSOR.com) – The percentage of Fortune 1000 companies with defined benefit (DB) plans that had not frozen any of them has fallen significantly over the last seven years, according to a new Towers Watson analysis.

A Towers Watson news release said 39% of Fortune 1000 companies with DB plans had none frozen in 2010, down markedly from the 59% seen six years earlier.

According to the announcement, between 2004 and 2010, the number of Fortune 1000 sponsors of at least one frozen plan more than quadrupled — from 45 in 2004 to 208 in 2010. Between 2004 and 2010, the percentage of DB plan sponsors with one or more frozen pension plans rose from 7% to roughly 36%.

The pension freeze trend and the move toward defined contribution (DC) programs have taken their toll.  ”Events such as the 2008 stock market crash highlight some potentially problematic effects on workforce patterns created by DC-only platforms,” Towers Watson commented. “Many DC plan accounts suffered major losses during the recent financial crisis, forcing some older workers to postpone retirement to recover from market losses and rebuild their retirement nest eggs.”

The Towers Watson study found that pension freezes among Fortune 1000 companies began accelerating in 2003. Thirty-one companies froze a pension plan in 2007, 23 in 2008, and 28 in 2009. There have been 18 freezes so far in 2010.

Between 2004 and 2010, DB sponsorship among the Fortune 1000 declined from 63% to 59%. Of the 74 companies new to the Fortune 1000 in 2010, 51 sponsor only a defined contribution (DC) plan and 23 maintain a DB plan (11 of which are frozen). Of the 74 companies that dropped off the 2009 list, 38 sponsor only a DC plan, while 36 maintain a DB plan (14 of which are frozen).

The percentage of companies sponsoring DB plans that have stayed on the Fortune 1000 is higher among the group in the benchmark from 2004 to 2010 than among today’s Fortune 1000 (65% versus 59%), and the percentage of DB sponsors that maintain one or more frozen plans is somewhat lower (34% for the long-term memners compared with 36% for the 2010 Fortune 1000 DB sponsors).

From fiscal year 2003 to 2009, service cost for pensions increased by roughly 5% for all companies in the analysis, while DC expense shot up 59%. The growth in service cost overall is primarily attributable to companies that have not frozen DB plans. Over this period, service cost increased by roughly 28% for sponsors of actively accruing pensions, but decreased by 53% for sponsors that froze at least one plan.

While DC plan expense rose for all companies, the increase was 102% for DB plans sponsors that first froze a pension plan in the last seven years, compared with 42% for DB plan sponsors that have not frozen a DB plan. “This is not surprising,” Towers Watson commented. “After freezing a DB plan, most companies enhance their matching or nonmatching DC contribution and/or adopt plan features to boost participation in their DC plan.”

More about the study is available at http://www.towerswatson.com/united-states/newsletters/insider/2761.