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Why Are Companies Freezing Their Pensions?

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Author Info

  • Alicia H. Munnell

    (Center for Retirment Research at Boston College)

  • Mauricio Soto

Abstract

Defined benefit plans in the private sector are on the decline. And the early 21st century produced an uptick in the pace of decline driven by the financially devastating impact of the ‘perfect storm’ of plummeting stock prices and low interest rates, legislation that will require underfunded plans to increase their contributions, and accounting changes that will force fluctuations in pension finance onto the earnings statement and will likely eliminate the smoothing available under current rules. Increased volatility is not acceptable to corporate managers and may, in large part, explain why large healthy companies have taken steps to end their defined benefit plans. In an attempt to identify factors that led specific companies to freeze their plans, this paper explores the relationship between the probability that a plan was frozen and characteristics of the plan, the firm, and the industry. The results imply that plans where credit balances are high relative to income, legacy costs are substantial and funding ratios are low have a higher probability of being frozen. That makes sense in that plans with these characteristics are likely to have the most impact on future earnings under the Financial Accounting Standards Board’s expected reporting requirements. It is reasonable to expect more plans with these characteristics to freeze in the future.

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File URL: http://crr.bc.edu/working-papers/why-are-companies-freezing-their-pensions/
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Bibliographic Info

Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2007-22.

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Length: 50 pages
Date of creation: Oct 2007
Date of revision: Dec 2007
Handle: RePEc:crr:crrwps:wp2007-22

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Cited by:
  1. Kandice Kapinos, 2012. "Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans," Journal of Labor Research, Springer, vol. 33(1), pages 91-103, March.
  2. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2007. "Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 2062-2086 National Bureau of Economic Research, Inc.
  3. Ashby H.B. Monk, 2009. "Pension Buyouts: What Can We Learn From the UK Experience?," Issues in Brief ib2009-9-21, Center for Retirement Research, revised Oct 2009.
  4. Alicia H. Munnell & Jean-Pierre Aubry & Dan Muldoon, 2008. "The Financial Crisis and Private Defined Benefit Plans," Issues in Brief ib2008-8-18, Center for Retirement Research, revised Nov 2008.
  5. Ashby H. B. Monk, 2009. "Pension Buyouts: What Can We Learn From The UK Experience?," Working Papers, Center for Retirement Research at Boston College wp2009-19, Center for Retirement Research, revised Sep 2009.
  6. Barbara A. Butrica & Howard M. Iams & Karen E. Smith & Eric J. Toder, 2009. "The Disappearing Defined Benefit Pension and its Potential Impact on the Retirement Incomes of Boomers," Working Papers, Center for Retirement Research at Boston College wp2009-2, Center for Retirement Research.
  7. Cathy Beaudoin & Nandini Chandar & Edward M. Werner, 2010. "Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?," Review of Accounting and Finance, Emerald Group Publishing, vol. 9(4), pages 424 - 451, November.

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