Level of Frozen, Terminated Plans up Sharply in 2004

June 22, 2005 (PLANSPONSOR.com) - The number of Fortune 1000 firms freezing or terminating their defined benefit pension plans skyrocketed by 36.6% last year, according to new Watson Wyatt data.

A news release said there were 71 frozen or terminated plans in 2004, up from 45 in 2003 and 39 in 2002. In addition to the 11% of plan sponsors with a frozen or terminated plan in 2004 (up from 7% the year before), 4% of employers (25 companies) had pension plans that were closed to new hires in 2004.

“Ongoing legal uncertainties about the status of cash balance plans and proposals to impose stricter funding requirements are driving up the number of plan closures and freezes,” said Sylvester Schieber, director of US benefits consulting at Watson Wyatt in the news release.   “Unless legislative action clarifies the defined benefit system soon, the current trend of freezing and terminating plans will likely continue to accelerate.”

The analysis also found that about half of the companies that terminate their plans drop off the Fortune 1000 list the following year, indicating that the decision may often be driven by weak financial performance.   About half of the companies that froze or terminated their plans in 2004 had credit ratings below investment grade, compared with 25% of firms with active pension plans, Watson Wyatt said.

The increased level of terminated or frozen plans comes despite the fact that improved returns in equity markets and sizable cash contributions by employers helped boost the average pension plan funding ratio to 83% in 2004. The average funding ratio was 81% in 2003 and 76% in 2002, the analysis found.

According to Watson Wyatt, the transportation industry sector, which includes airlines, experienced the lowest funding status, with an average funding ratio slightly under 70%. The banking, securities and commodity brokerage industry had the highest funding status, with an average funding ratio of 99%.   The communication, electric, gas and sanitary services industries were also more properly funded at 87%.  

The analysis also noted that companies that froze or terminated their plans had an average funding ratio of 75%, compared with 83% for companies with active plans.   In contrast to freezing or termination, closing to new participants does not appear to be a decision made by troubled companies, Watson Wyatt said.