Q1. What is meant by “freezing” a pension Plan?
If a company decides to freeze a pension plan, a few or all of the employees covered under that plan cease to earn some or all of plan benefits right from the point of freeze and beyond. Which employees will be affected and what benefits will be ceased depends on the specific plan & situation. Companies generally are free to freeze or modify their pension plans but they are never allowed to take away what the employees have already earned (up to the freeze date); this includes additional benefits as well.
Q2. What are the different types of freezes?
There are several types of pension freezes, resulting in frozen pension, depending on the conditions where some or all employees are allowed to continue accruing their regular benefits offered under the plan. There are various terms adopted to define different types of pension freezes such as partial freeze, hard freeze and soft freeze. It is good to understand the ways your employer freezes the plan.
- Your employer can completely freeze a plan barring the employees from getting all the further benefits of the plan. If an employer freezes a fully funded pension plan like this, all the employees immediately become 100% vested in all the things they have earned till now under the plan; they however lose the power to continue getting any further benefits.
- Otherwise, a pension freeze can selectively cease the benefits for few employees/participants but not for all. This type of freeze is normally applied when employer does not allow new employees or participants to enroll for the plan, but allows the continuance of the plan for existing participants.
- And finally, another type of freeze may cease participants from receiving pension credit for further working years in the plan but permits the benefits to be calculated over their salary at the time of their leaving the plan rather than on the day of freeze.
Q3. How can the special early retirement benefits be affected by pension freeze?
In case a pension plans promises that participants with specific age and service requirement will get unreduced or partly unreduced pension for early retirement, the amount of this special early retirement pension earned by the employee as on the day of freeze will remain protected only if the employees in later years fulfill the requirements stated for those benefits. It is to be noted here that some pension plans only offer such protection only if this special early retirement pension is given or paid to the employees as lifetime annuity and not as lump sum payout.
Q4. What is the difference between freeze and termination?
When a company decides to freeze a pension plan, its participants may cease to earn benefits while the pension plan continues to be operational. It remains insured by “Federal Pension Insurance Corporation” and there are chances that the plan might be unfrozen in future.
But, when a pension plan is terminated, it totally stops and ceases all its operations. If there are underfunded plans, a few or all of the assured benefits will most likely be paid by the “Federal Pension Insurance Corporation” program. And in case the plan is overfunded, it is turned over to the insurance company that will get over payments of the benefits.
Q5. Why are plans frozen by employers?
Companies provide different reasons for freezing pension plans. Some financially strong companies state that freezing is essential to be spirited with other companies that do not offer pension plans. Some other companies say pension freeze are essential to pay towards increasing costs of health insurances. Many other companies indicate towards modifications in accounting rules, pending court cases or the volatility of rate of interest. A few other companies also claim that their pension participants do not value it much and prefer savings plans. No matter what reasons are provided by the companies, the harsh truth is that pension freeze save them money and due to accounting rules, they are also allowed to project significant growth in operating income in their reports to shareholders.
Employers who are not financially strong also go for freezing their pension plans so as to lessen the expenses. At times, they are under pressure of their creditors to do so and sometimes to protect their bankruptcy. An employer may also freeze a plan if it acquires another plan and it is too difficult to merge both the plans together. Normally, the companies that decide to freeze defined benefit plans, offers superior savings plan to the participants.
Q6. Are companies allowed to freeze the pension plans?
According to the current law, companies are allowed to modify, freeze or eliminate the pension plans altogether. In such a case, the benefits already earned by an employee are protected.
Q7. Who can be affected by a pension freeze?
Since all the benefits earned by an employee before the day of freeze are protected by the law, the employees or retirees who leave their employment before implementation of freeze will not lose the benefits. In simple words, pension freeze can only affect the employees for whom the employer’s promise to continue the earning of benefits under a plan is withdrawn.