The big Thaw: Unfreeze defined benefit pension with cash balance plans

The recent resurgence of defined benefit (DB) pensions through cash balance (CB) plans has sparked discussions and captured the attention of employers, unions, and benefits experts. However, there remains limited understanding of how unfreezing DB pensions impacts a firm. To address this gap, we explore the cost and benefit tradeoffs associated with pension unfreezing using a model calibrated to market data within a stochastic framework. Our analysis reveals that the extent to which restarting DB pensions affects a firm’s total pension cost depends on factors such as pension surplus magnitude, employee salaries, firm financial stability, and Pension Benefit Guaranty Corporation (PBGC) premiums. In particular, with a high funding surplus and elevated employee salaries, unfreezing a CB plan can yield greater cost efficiency for companies than pension risk transfer, especially in a high interest rate environment. Our findings provide valuable insights for pension sponsors contemplating the reopening of DB pensions through CB plans, which could potentially counteract the current trends in pension de-risking.