Administering Pension Plans: Freeze ‘Em and Forget ‘Em is Not a Practical Strategy

February 8, 2006

Reading the popular press leaves the impression that freezing pension plans is inevitable in corporate America. While there is much more to the story and one could point to a number of companies who are committed to their pensions and even some who are starting new plans, there is no doubt that some companies have decided that offering future pension benefits is no longer consistent with their corporate strategies. For these companies, pension administrators find themselves in need of support for the argument that freezing a plan does not eliminate it from the corporate agenda. In fact, these plans will require active management for at least a generation to come - a burden for HR departments long after a plan freeze is implemented.

With all of the talk about pension plans being frozen, the two primary freeze designs are lumped together in the public vernacular. Although they are talked about in the same breath, a design that freezes the plan to new entrants is very different from one that freezes all future accruals under the plan. These are very different approaches taken for a variety of different strategic reasons, and the designs result in very different requirements for a plan administrator.

Freeze Plan to New Entrants

Some organizations announce a pension freeze that is designed to continue building pension benefits for existing plan participants, but will allow no one further to join the plan. While this design may impact recruiting, new hire orientation and/or employee relations, it has a minimal impact to pension administration. In this scenario, administrators can eliminate new hire communication and may be able to stop tracking eligibility and participation dates depending on the design specifics. However, there is no relief from the existing recordkeeping around tracking pay, service, employment status, transfers and all of the other wonderful details of pension recordkeeping. The work required to do calculations and make distributions is virtually unchanged.

This design approach can actually increase the workload for administrators who must create transition rules and update systems and procedures accordingly. In addition, administrators should expect a near-term spike in workload as the new design is announced and employees inquire about what the changes mean to each individually.

Freeze Plan Accruals for All

Under these scenarios, pension plan benefits are frozen as of a particular date with no further benefits building for any participant in a given plan. In these situations, the freeze may apply to all employees or just certain pension plans sponsored by an employer (e.g., management or salaried plan). In these cases, the temptation is to think that the pension plan will no longer need attention because it ceases ongoing accruals. However, this is far from a practical conclusion.

In this design scenario, often referred to as a “hard freeze,” the HR department has very little reduction in workload required to administer the pension plan. While some of the tracking requirements are minimized on an ongoing basis (e.g., future pay), many data elements (e.g., employment status) must still be fed into the recordkeeping system for use in an estimate or a final calculation upon termination. Upon distribution eligibility (e.g., retirement, disability, termination), a final benefit must be calculated with optional forms of payment and any early retirement subsidies accurately applied. And just as with any other active pension plan, distributions must be managed until the last participant and beneficiary remain entitled to payment from the plan.

What Should An Employer Do?

Given the requirement for deep knowledge of the complex plan formulas and administrative practices that surround a pension plan, employers must recognize the need for ongoing expert resources to manage even a frozen plan. Since the decision to freeze a plan is almost always a corollary to an overall cost-cutting campaign, these expert resources may be eliminated under the false notion that the frozen plan requires no substantial ongoing support. Employers who take this action are doing so at great peril if they don’t establish and execute a plan for maintaining institutional knowledge of the plan’s data, calculations, and administrative procedures. For those who don’t keep such knowledge in-house, it is imperative that external resources (e.g., an expert recordkeeper, the plan’s actuary) be retained to manage the plan to its ultimate end-point.

To mitigate much of the risk of retaining detailed capabilities either internally or externally, smart plan sponsors calculate and store normal form pension accruals for all plan participants as of the date of the plan freeze. In addition to a calculation program for establishing normal form calculations, this approach requires that all data be usable - typically meaning that records should be converted to an automated media. However, some pension plans have historical records that are missing data elements and require an expert to investigate and interpret the available history in order to apply the plan rules to an individual participant’s situation. Undertaking a one-time clean-up of missing or inaccurate records is achievable at or around the time of the plan freeze when long-time plan experts are available as opposed to after they have retired or been laid off. While this seems like a significant task for some employers, the effort and expense is likely to pay off dramatically by reducing both ongoing administrative costs and future exposure to errors, litigation or bad publicity.

Overall, HR professionals know and accept that freezing pension plans is a strategic corporate decision that must be made with only minimal focus on the administrative considerations that surround it. However, this action has the potential to create substantial new work for HR and certainly creates a challenging resource need if the long-term plan management requirements aren’t identified, evaluated, and effectively built into a plan for the future. As design decisions are made, administrators must find effective ways to raise this important consideration and ensure that the plan has the necessary management oversight that is required of all qualified retirement plans. To do anything less is to put the sponsoring organization at great risk.

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What steps must employers take in order to effectively support a frozen pension plan? Below is a checklist that plan sponsors can use to evaluate their preparedness to manage these plans for today and for the years ahead.

Frozen Pension Plan Administration Tasks
Establish a Communication Plan for Employees
√	Prepare effective announcement of changes
√	Respond promptly to inquiries from individuals
√	Provide participant-specific impact of the freeze (i.e., what happens to me?)
√	Clarify ongoing services to be provided to those with plan benefits
Evaluate Data Management Needs
√	Review overall data sources to determine whether they are complete and accurate enough to support batch calculations.
√	If data is not sufficiently clean or accurate to support administration needs, determine whether a data clean-up project can be completed to avoid the need for ongoing interpretation expertise.
√	If a data clean-up project is not possible, establish written procedures and document interpretation rules to ensure appropriate use of accurate and complete data required for “on demand” calculations.
Plan for Ongoing Calculation Support
√	Whenever possible, calculate all accrued benefits (normal form) at date of freeze and document procedures and interpretation rules for use in applying early retirement subsidies and optional form factors.
√	If it is not practical to complete a one-time batch calculation of normal form benefits, establish written procedures, robust and varied calculation examples, and documented interpretation rules regarding how to apply plan provisions and administrative practices to “on demand” calculations.
Anticipate Necessary Staffing Levels for Ongoing Administration
√	Evaluate cost-benefit of self-service capabilities vs. retained staff (internal or external) that can provide higher touch services.
√	Ensure that the necessary resources are retained (internally or externally) to ensure that reporting, disclosure and government filing requirements are met as required for ongoing plan compliance.
√	Determine the level of ongoing data management that will be required based on strategy for data interpretation/automation and calculation support.
√	Establish strong oversight and controls over plan distributions.