September 2010
U.S.: Insider
Pension Freezes Continue Among Fortune 1000 Companies in 2010
By Brendan McFarland and Erika Kummernuss
From 2009 to 2010, the number of Fortune 1000 companies sponsoring a
frozen pension plan increased by 4%. After peaking in 2006, the overall freeze
rate has remained relatively constant over the last three years, as the economic
climate has remained uncertain. Meanwhile, the number of sponsors of defined
benefit (DB) plans (both active and frozen) in the Fortune 1000 has
continued to decline modestly, as new entrants to the list are more likely to
sponsor only defined contribution (DC) plans.
This shift from DB to DC plans has been ongoing for more than 10 years now,
driven by a variety of plan sponsor motives, including addressing financial
difficulties, aligning retirement packages to better compete in a global market
and reducing risk. Notably, regulatory uncertainty around hybrid DB plans, such
as cash balance designs, has significantly contributed to the trend. The shift
to DC plans typically transfers retirement responsibility from employers to
employees, most of whom will manage their own contributions, accumulations and
eventual withdrawals under those DC arrangements.
Towers Watson has been collecting data on DB sponsors in the Fortune
1000 for many years, with a particular focus on firms that have frozen their
plans. In a DB plan freeze, the company typically retains the plan but stops
future accruals for all or some workers. Freezes can take various forms.
Traditional pensions, which use a pay-and-service-related formula, can halt the
years-of-service component of the formula, freeze the pay portion to disregard
future salary increases or both. In a hybrid or other account-based pension
plan, companies typically stop making pay credits to the accounts, but balances
continue to accrue interest.
Many large companies sponsor more than one pension plan. Some maintain
different plans for unionized and salaried workforces, and others have multiple
plans due to mergers and acquisitions. So a sponsor of a frozen plan might also
maintain an active DB plan, which is indeed the case for some firms in this
analysis. We identify the total number of DB plan sponsors, the number that have
frozen at least one pension plan and the number that have never frozen a DB
plan.
DB sponsorship and freezes among the Fortune 1000
In this analysis, firms are classified as DB sponsors if they maintain DB
plans, even if the plans are frozen. Between 2004 and 2010, DB sponsorship among
the Fortune 1000 declined from 63% to 59%. Turnover in the
Fortune 1000 list plays a large role in the decline. Historically,
companies edged off the list have tended to sponsor DB plans, while their
replacements have not. Of the 74 companies new to the Fortune 1000 in
2010, 51 sponsor only a DC plan and 23 maintain a DB plan (11 of which are
frozen). Of the 74 companies that dropped off the 2009 list, 38 sponsor only a
DC plan, while 36 maintain a DB plan (14 of which are frozen).
Plan terminations also contribute to the decline in DB sponsorship, as some
companies have offloaded plan assets and liabilities to third parties over the
last several years (see gTerminated plansh below).
The percentage of Fortune 1000 companies that sponsor DB plans and
have not frozen any of them has fallen significantly over the last seven years.
In 2004, 59% of Fortune 1000 companies maintained DB plans and had no
frozen plans, compared with only 38% in 2010. Over the seven-year period, the
number of Fortune 1000 sponsors of at least one frozen plan has more
than quadrupled — from 45 in 2004 to 208 in 2010 (as shown in Figure 1). Between
2004 and 2010, the percentage of DB plan sponsors with one or more frozen
pension plans rose from 7% to roughly 36%.
Figure 1. DB sponsorship among Fortune 1000,
2004-2010
Fortune 1000 list year |
Number of DB plan sponsors |
Sponsors of actively accruing DB plans with no frozen
plans |
Sponsors of one or more frozen DB plans |
2010 |
586 |
378 |
208 |
2009 |
607 |
417 |
190 |
2008 |
624 |
455 |
169 |
2007 |
638 |
500 |
138 |
2006 |
627 |
514 |
113 |
2005 |
627 |
556 |
71 |
2004 |
633 |
588 |
45 |
Source: Towers Watson.
Timing of freezes and composition effect of 2010 Fortune 1000
Pension freezes among Fortune 1000 companies began accelerating in
2003. Figure 2 shows the incidence of pension freezes from 1989 to 2019
(including planned freezes) for the 2010 Fortune 1000. Thirty-one
companies froze a pension plan in 2007, 23 in 2008 and 28 in 2009. There have
been 18 freezes so far in 2010.1
Figure 2. Incidence of pension freezes in Fortune
1000, 1989-2019*
*Announced and planned after 2010.
Source: Towers Watson.
We next examine companies that have remained on the Fortune 1000
list since we began our study seven years ago (see Figure 3). This analysis is
one way to highlight the effects of turnover in the Fortune 1000 on our
results.
Figure 3. Current DB sponsorship for Fortune 1000 companies
since 2004
Companies in Fortune 1000 since 2004 |
Number of DB plan sponsors |
Sponsors of actively accruing DB plans with no frozen
plans |
Sponsors with one or more frozen DB plans |
723 |
472 |
311 |
161 |
Source: Towers Watson.
Plan sponsorship for the seven-year Fortune 1000 group looks
slightly different from sponsorship for the 2010 group (see Figures 1 and 3).
The percentage of companies sponsoring DB plans is higher among the seven-year
group than among todayfs Fortune 1000 (65% versus 59%), and the
percentage of DB sponsors that maintain one or more frozen plans is somewhat
lower (34% for our seven-year group compared with 36% for the 2010
Fortune 1000 DB sponsors).
We next look at three retirement-expense accounting measures (where full
financial data were available for comparison) for the seven-year Fortune
1000 group.
Figure 4 shows service cost, which is the actuarial present value of pension
benefits accrued during the year, net pension expense and DC expense for fiscal
years 2003 and 2009.2 These values are calculated on
an average basis for three categories of DB plan sponsors: those with no frozen
plans, those that first froze one or more of their plans between 2004 and 2010,
and those that froze at least one plan before 2004.
Figure 4. Service cost, net pension expense and DC expense for
seven-year Fortune 1000 group ($ thousands)
2003 |
|
Count |
Average service
cost |
Average net
pension expense |
Average DC plan expense |
All companies |
335 |
$54,414 |
$56,888 |
$35,723 |
No frozen DB plans |
227 |
$57,948 |
$56,078 |
$34,799 |
First froze DB plan in 2004-2010 |
82 |
$60,763 |
$75,012 |
$41,856 |
First froze DB plan before 2004 |
26 |
$3,532 |
$6,801 |
$24,441 |
2009 |
|
Count |
Average service
cost |
Average net
pension expense |
Average DC plan expense |
All companies |
335 |
$57,395 |
$86,070 |
$56,888 |
No frozen DB plans |
227 |
$74,171 |
$101,633 |
$49,337 |
First froze DB plan in 2004-2010 |
82 |
$28,704 |
$67,772 |
$84,356 |
First froze DB plan before 2004 |
26 |
$1,412 |
$7,902 |
$27,947 |
Source: Towers Watson.
From fiscal year 2003 to 2009, service cost for pensions increased by roughly
5% for all companies in this analysis, while DC expense shot up 59%. The growth
in service cost overall is primarily attributable to companies that have not
frozen DB plans. Service costs rise due to salary increases, declines in the
interest rates used to calculate the service cost component and other
factors.3 Over this period, service cost increased
by roughly 28% for sponsors of actively accruing pensions, but decreased by 53%
for sponsors that froze at least one plan.4
While DC plan expense rose for all companies, the increase was 102% for DB
plan sponsors that first froze a pension plan in the last seven years, compared
with 42% for DB plan sponsors that have not frozen a DB plan. This is not
surprising. After freezing a DB plan, most companies enhance their matching or
nonmatching DC contribution and/or adopt plan features to boost participation in
their DC plan.
Pension expense is the total measure of expense for a DB plan. In addition to
being influenced by the same factors as service cost, pension expense is greatly
affected by the planfs funded status. At year-end 2009, average pension expense
had declined by 10% in companies that had first frozen a pension in the last
seven years, likely due to the reduction of service cost offset by increased
expense due to declines in funded status. At the other end of the spectrum, DB
plan sponsors that had not frozen a DB plan reported an 81% increase in pension
expense by the end of fiscal 2009, with much of this increase likely
attributable to declines in funded status.
From 2003 to 2009, average retirement expense (net pension expense plus DC
plan expense) increased by 54% for all companies, 30% for companies that froze a
DB plan and 66% for DB plan sponsors with no frozen plans. Note that although
the changes over the period are very different, average costs in 2009 are
virtually the same for those that have never frozen a DB plan and those that
froze a plan after 2003.
Industry analysis
In the past, most companies that froze their DB plan were in financial
distress. More recently, pension freezes have spread across all sectors,
although some industries experience higher freeze rates than others (see Figure
5).
Industries with higher DB sponsorship rates are less likely to freeze a plan
than those with lower sponsorship rates. The utilities industry is a good
example. It has high rates of DB sponsorship and very few plan freezes. Plan
sponsorship rates are generally linked to companiesf financial success and
stability, as well as to the rewards strategy commonly employed within the
industry.
Figure 5. DB sponsorship in the 2010 Fortune 1000 by
industry
Industry (sorted by % of DB
sponsors) |
Firms in Fortune 1000 |
Number of DB plan sponsors |
Firms with no pension freezes |
Firms that have frozen one or more DB plans |
% of firms that are DB plan sponsors |
% of firms with no pension freezes |
% of firms with one or more frozen DB
plans |
Aerospace and defense |
7 |
7 |
6 |
1 |
100.0% |
85.7% |
14.3% |
Utilities |
63 |
59 |
53 |
6 |
93.7% |
89.8% |
10.2% |
Food and beverage |
32 |
29 |
23 |
6 |
90.6% |
79.3% |
18.8% |
Manufacturing |
155 |
128 |
88 |
40 |
82.6% |
68.8% |
31.3% |
Automobiles and transportation equipment |
21 |
17 |
10 |
7 |
81.0% |
58.8% |
41.2% |
Natural resources |
64 |
48 |
35 |
13 |
75.0% |
72.9% |
27.1% |
Energy |
34 |
22 |
16 |
6 |
64.7% |
72.7% |
27.3% |
Wholesale |
39 |
25 |
12 |
13 |
64.1% |
48.0% |
52.0% |
Insurance |
64 |
40 |
32 |
8 |
62.5 % |
80.0% |
20.0% |
Financial services |
66 |
40 |
19 |
21 |
60.6% |
47.5% |
52.5% |
Transportation |
32 |
19 |
11 |
8 |
59.4% |
57.9% |
42.1% |
Communications |
53 |
29 |
13 |
16 |
54.7% |
44.8% |
55.2% |
Pharmaceuticals |
22 |
9 |
6 |
3 |
40.9% |
66.7% |
33.3% |
Professional and business services |
65 |
26 |
13 |
13 |
40.0% |
50.0% |
50.0% |
High technology |
78 |
29 |
12 |
17 |
37.2% |
41.4% |
58.6% |
Retail |
113 |
37 |
17 |
20 |
32.7% |
45.9% |
54.1% |
Health care |
50 |
14 |
10 |
4 |
28.0% |
71.4% |
28.6% |
Property and construction |
22 |
5 |
2 |
3 |
22.7% |
40.0% |
60.0% |
Tourism and leisure |
17 |
3 |
0 |
3 |
11.8% |
n/a |
100% |
Education |
3 |
0 |
0 |
0 |
0.0% |
n/a |
n/a |
Source: Towers Watson.
Over the last year, the percentage of companies with one or more frozen plans
has increased in most sectors, with the communications and retail sectors having
realized the largest changes.
In 2010, 55% of DB sponsors in the communications sector maintain at least
one frozen DB plan, compared with 43% last year and 30% in 2008. Between the
2008 and 2010 analyses, the percentage of sponsors in the retail sector with one
or more frozen DB plans jumped from 36% to 54% — an 18-percentage-point
increase. The retail sector has one of the lowest DB sponsorship rates of any
sector.
Closing plans to new hires
Over the last several years, Towers Watson has also tracked Fortune
1000 firms that close a DB plan to new hires. When a DB plan is closed, current
employees continue to earn pension benefits, but employees hired after the close
date cannot participate in the plan. If a company closed a DB plan but also
froze another plan or closed the plan before freezing it, it is considered to
have frozen a pension plan for this analysis. Between 2005 and 2010, the number
of companies that closed at least one DB plan to new hires rose from 25 to 85.
Only 29% of Fortune 1000 companies maintain a DB plan and have neither
frozen nor closed one of the plans to new hires. Of DB plan sponsors, 50% now
have at least one plan that is either frozen or closed to new hires — up from
44% last year.
Terminated plans
In addition to freezing and closing DB plans, some firms in the
Fortune 1000 have chosen to terminate their DB plans, which also
contributed to the decrease in companies that maintained a DB plan over the past
year. In a terminated pension plan, all benefits are settled by transferring
assets and liabilities to a third party (typically an insurance company), paying
all benefit obligations directly to participants or some combination of the two
approaches.
Therefore, a termination implies a plan freeze has already occurred. Eleven
Fortune 1000 companies have terminated one or more pension plans or are
in the process of doing so. Eight of the 11 companies either started or
completed this process within the last two years. In one termination, the
company had to unload its pension liabilities to the Pension Benefit Guaranty
Corporation5 due to financial distress. The other
companies voluntarily terminated their plans.
Conclusion
The march of pension freezes continues at a steady pace. Only 38% of
Fortune 1000 companies currently maintain a DB plan and have no frozen
plans — a stark decline from 2004, when 59% of Fortune 1000 companies
had not frozen a DB plan. Many companies today are opting to provide DC plans as
the sole vehicle for accumulating retirement income.
The shift from traditional DB plans to DC plans has redirected a share of
employer funding away from older workers, thereby enabling younger workers to
make more significant contributions toward a financially secure retirement.
Nonetheless, events such as the 2008 stock market crash highlight some
potentially problematic effects on workforce patterns created by DC-only
platforms. Many DC plan accounts suffered major losses during the recent
financial crisis, forcing some older workers to postpone retirement to recover
from market losses and rebuild their retirement nest eggs.
Despite ongoing pension freezes, companies in industries with high DB plan
sponsorship rates have been more likely to keep their plans alive than other
companies (except for the troubled auto and finance industries), and this
pattern could continue into the future. Some of these plan sponsors may have
taken steps to minimize the risks associated with DB plan sponsorship so they
can enjoy the advantages of DB plans over DC plans. DB plans provide greater
reliability and security for workers, and offer sponsors unique opportunities
for long-term financial efficiency and workforce management.
1 If a plan is frozen as of December 31, we consider
the freeze to occur the following year (e.g., if a sponsor freezes a plan on
December 31, 2009, participants have already accrued their 2009 benefits, so we
consider 2010 the year of the freeze).
2 Net pension expense consists of service cost and
all other components, including net interest on unfunded liability and
amortization of past gains/losses and plan amendments. DC expense includes
matching and nonmatching employer contributions for the year, which in some
cases are offset by forfeitures for terminating participants who are not fully
vested.
3 Decreases in discount rates increase service cost.
Discount rates at year-end 2002 averaged 6.7% compared with 6.3% at year-end
2008.
4 The service cost is non-zero for these companies
as well as the group that froze a plan before 2004 because some companies freeze
a DB plan for one group of workers (typically salaried) but keep the plan
actively accruing benefits for other workers (typically union or hourly
employees) or subsidiaries.
5 The Pension Benefit Guaranty Corporation is a
federal insurance program funded by DB plan sponsors that protects the benefits
of participants in private DB plans if a companyfs pension plan defaults.