Smaller Plans Cautioned on Freezing Trend

July 5, 2006 ( - Chicago - A growing number of larger companies have moved to freeze their defined benefit plans with the hopes of decreasing risk and cost, but whether those goals can be realized remains a controversial issue.

“If the goal is to reduce the risk of the plan, [plan sponsors] should re-assess the asset mix, but if it is to reduce cost, then that might be an outcome of freezing the plan,” said Ed Helibron, Senior Portfolio Manager, Pyramis Global Advisors, at PLANSPONSOR magazine’s Plan Designs 2006 conference in Chicago last week, addressing a group representing plans with $50 million or less in plan assets.  

Of course, Congress is now trying to hammer out a pension bill that will, among other things, set how the liabilities of DB plans should be accounted for on the balance sheets (see  Another Deadline Missed for Pension Reform Compromise ).

Accounting Standards

“The new legislation is looking more like accounting standards,” said Panelist Jeffrey Schapel, Manager, Actuarial Consulting, Benefits & Insurances at CBIZ Inc. “[Congress] is wanting to tighten the reins on the actuary and try to force everyone to be more funded more quickly,” he added.

This has send companies scurrying, worried that they will have to account for long-term pension liabilities on their balance sheets on an accelerated basis (see  Let It All Hang Out ).

Another measure that is expected to be decided on by Congress is an actuarial method used to spread the asset losses over a period of time, rather than put the entire loss on the balance sheet, better known as “smoothing.”

“Getting rid of smoothing is a good thing,” said Helibron. “If asset value is inflated, it allows sponsors to not contribute to the plan, and that does not reduce the volatility of the plan” he added.
  Some argue that “smoothing” losses actually deceives participants, because they are not getting a true picture of the health of the plan (see  Plan Sponsors Not Waiting for Reform to Consider Pension Options ).

Some companies are not even sure what freezing a plan will do, knowing little more than the fact that it seems to be a trend hailed by some as a way to reduce the risk linked to DB plans.

However, when companies take a closer look at the immediate cost they will bear as a result of terminating the plan, that scares them, Dulaney said. He added that companies will have to pay the costs of benefits that have already accrued which will likely be a hefty amount.

When deciding whether to freeze a DB plan, companies are mostly looking from a finance perspective, rather than the benefits side of the equation, Schapel said. He said that companies should also consider the value of the benefit to its employees -- which will be different for each company. For instance, do the employees really value their DB plans and is it important to employee retention?

Dulaney said that when employers come to him contemplating freezing their DB plans, he tries to dig to the bottom of why they might want to do it. "I try to take them a step back," because some of them might not be very financially savvy and really don't understand what freezing a plan will do. "They just know the plans are expensive and see other companies taking that step," he said.