US - Workers in final-average pension plans would have to save an average of about 8% percent of their annual salary to make up for a pension freeze, a new report has found.
The estimate, issued by the Employee Benefit Research Institute (EBRI), is based on the assumption of an 8% return in the final-average plan. This type of plan calculates benefits on the number of years of participation and the average salary in the worker's final years with the employer, typically three to five.
The analysis has presented its findings in terms of the additional compensation in a 401(k) plan, whether provided by an employer or worker, needed to cover the accruals lost to a pension freeze.
The EBRI report added that in some cases, the pension plan sponsor offsets the pension freeze by increasing its match in the workers' 401(k) plan, but that each case is different, and in some cases the lost pension benefit is not replaced.
The report warned workers in career-average pension plans, which calculate retirement benefits on the number of years of participation and the average salary during the employee's entire career with the employer, would have to save a median amount of about 7% percent of their annual salary to replace the lost accrual benefits from a pension freeze, assuming an 8% rate of return.
Workers in cash balance plans, whose benefits are calculated on annual pay and interest credits, would have to save about 3% percent of their annual salary to make up for the pension freeze.
The analysis pointed out that in all of these scenarios, the contribution rate would be more if a lower rate of return was achieved. The given results are estimates based on a 4% rate of return.
It also noted that recent high-profile announcements of pension freezes are, “part of the well-documented and long-term decline of 'traditional' pension plans.
By Lisa Haines
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