US - A significant 32% of companies had already frozen their defined benefit plans as pensions become an increasingly worrying problem with few solutions, a Towers Perrin survey has found.
Principal Cecil Hemingway warned that freezing a DB plan was only a half-measure that slowed the growth of the plan, but did little to alleviate the associated market and mortality risk.
It is for this very reason that most senior finance executives are examining a variety of solutions to contain growing pension risks. However, they are dissatisfied with the range of currently available options and, to some extent confused or put off by the competing claims of potential solution providers, he said.
The most likely reason for a company to freeze its active pension plans would be the plan’s negative effect on company cash flow (60%), followed by negative effects on company earnings (48%) and the cost of capital/lower credit rating (43%).
In a separate report by the Center for Retirement Research at Boston College, it was revelaed that even a number of healthy companies were freezing their DB pensions plans in preference of 401(k)s, a shift that could leave many of today’s younger workers with inadequate retirement income.
“While 401(k) retirement plans are fine in thery and could even be superior for the mobile employee, they transfer too mcuh of the responsibility to the individuals, and individuals make mistakes every step alonf the way,” the report claimed.
There were a number of reasons behind the migration, including a desire to control compensation costs, the confluence of economice demographic and regulatory risk and the emergence pf a two-tier pensions system. All of these factors, the report claimed, made the sponsorship of DB plans unattractive.
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