PBGC Reports Pension Plan Exodus Overstated

December 21, 2005 (PLANSPONSOR.com) - From an examination of Form 5500 annual reports, the Pension Benefit Guaranty Corporation (PBGC) found that 9.4% of pension plans were frozen as of 2003.

In its news release, the PBGC said that only 2.5% of pension plan participants were affected, however, because most frozen plans were small. “While anecdotal evidence suggests that the number of frozen pension plans has increased since 2003, reports of a mass exodus from the defined benefit pension system appear to be overstated,” said PBGC Executive Director Bradley Belt, in the release.

According to the survey data, 10.1% of small plans (those with fewer than 100 participants) were frozen, affecting 12.5% of the participants in these plans, while only 2.2% of large plans (with more than 5,000 participants) were frozen, affecting only 1% of their participants.

The PBGC also found that, on average, frozen plans are not as well funded as non-frozen plans. Half of frozen plans were less than 80% funded on a current liability basis, versus one-third of non-frozen plans.

Industries more likely to have frozen plans included fabricated metals (16.1%), apparel and textiles (15.9%), rubber and plastics (12.4%), primary metals (12.3%), and retail trade (12.3%). Plan freezes were less likely in the public utility (2.7%), motor vehicle (4.6%), and the finance, insurance and real estate industries (5.6%).

The PBGC said this causes mixed effects on its financial condition. On the negative side, to the extent that frozen plans are more likely to be terminated by employers, the number of participants in the system would decline and the PBGC’s flat-rate premium would be reduced. On the positive side, to the extent that frozen plans become better funded as a result of the cap on new benefit accruals,claims against the pension insurance program are likely to be smaller.

The PBGC’s full report is here .

Counter Argument

The Employee Benefit Research Institute (EBRI), however, argues that the 2003 Form 5500 data is the most recent available, but misses recent activity by plan sponsors and probably undercounts a significant increase in pension freezes or terminations.

Also, “The PBGC report misses much of what has been happening among defined benefit plans because the Form 5500 only asks about total plan freezes (ending accruals for all current participants and closing the plan to new hires), not those closing the plan to new hires and giving them a different plan,” EBRI president Dallas Salisbury said in a news release.

Salisbury says the PBGC report misses all of 2004 and 2005 activity and activity that happened in the 2003 plan year that was treated as being within the 2004 plan year. For example, a recent Watson Wyatt Worldwide analysis found that among Fortune 1000 firms in 2004, 11% of the sponsors had a frozen or terminated plan, up from just 7% only one year earlier,” he said.

Noting that many surveys have shown that closing plans to new hires has become a widespread trend, Salisbury said that EBRI simulations conducted in 2004 showed that freezing benefit accruals for all private-sector defined benefit pension plans beginning in 2005 would have a large impact on younger cohorts. The average annual decrease in real first-year surplus (retirement income less retirement expenses) for those in the youngest cohort modeled (born between 1961 and 1965, inclusive, or those currently between ages 40 and 44) would be $4,886 for families, $2,752 for single males, and $1,686 for single females, according to the EBRI analysis.

“This is hardly the basis for good cheer and optimistic statements about the future of defined benefit plans and the PBGC,” Salisbury concluded.

PricewaterhouseCoopers’ Management Barometer recently found that expense and funding volatility, along with recent pension reform, has caused 67% of employers to close their defined benefit pension plan to new hires, and 63% freeze their plan (SeeExpense and Funding Volatility Lead Co.’s to Ax Pension Plans). Another recent study warns that employers face new risks after freezing a DB plan (See Study Warns DB Plan Freezing Doesn’t Mitigate All Risks).