A roadmap for effectively managing a frozen pension plan

An aging workforce, low interest rates, uncertain investment returns, and elevated PBGC premiums have put significant financial pressures on pension plan sponsors. To cope, more organizations are choosing to freeze their plans—either closing them to new entrants or discontinuing accruals for some or all of their employees.

 

While freezing a plan limits the future growth of its liability and may help alleviate some risk, a frozen plan still requires significant attention and resources. Plan sponsors may be required to continue making cash contributions to meet the plan’s target liability, and the same market fluctuations and interest rate risks that affected the active plan will continue for the frozen plan.

 

In addition, the need remains for accounting, reporting, compliance, fiduciary and investment oversight, as well as participant administration and communications. These responsibilities can strain resources—particularly if the organization has already introduced another retirement savings program, such as a defined contribution plan, and has to cover the costs of those enhanced benefits.

 

Plan sponsors of frozen plans generally fall into one of two broad categories— opportunistic or deliberate—depending on their risk philosophy and financial constraints. While some opportunistic sponsors may be successful in reaching their goals without thoughtful planning, the preferred strategy is to work actively toward a more predictable end.

 

This paper provides a four-step road map for deliberate sponsors who want to implement an effective strategy for managing their frozen pension plan—with the goal of either terminating the plan or managing costs and risks over a longer time horizon. Of course, you should always consult with your company’s legal, tax, actuarial and investment advisors before implementing any changes.

 

Frozen plan management strategy

 

Creating a strategy for assets to outperform liabilities and managing plan costs and risks over the desired time horizon

STEP 1

Evaluate goals

  • Time horizon
  • Cash constraints
  • Earnings implications

STEP 2

Understand the key liability and other key pension metrics

  • Balance sheet
  • ERISA funding liability
  • Termination liability

STEP 3

Implement an asset/liability investment approach

  • Limit contribution volatility
  • Manage toward funding target

STEP 4

Implement and track revised investment strategy

  • Track funded progress
  • Periodic re-optimization and de-risking

Read our paper for a more in-depth look at these findings.

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