Even the frozen pension plans need active management. When a company announces freezing of a pension plan, meaning there will be no new enrollments in the plan, this doesn’t mean that frozen pension plans become less of a challenge.
What To Do When Pension Plan Freezes
Managing the frozen pension plan as a financial obligation requires equal amount of planning as for managing active pension plans. Frozen pension plans are not too different from active pension plans – the only differ in relative sizes and treatment of the financial obligation that increases by means of service associated benefits.
To effectively manage their frozen pension plans, sponsors need to review their financial structure, strategies and perspectives. A well documented strategy is always recommended for companies looking for management solution for frozen pensions because it will give a common reference document to both – the sponsors and the stakeholders.
The key for companies that are considering freezing the pension plans is to time the pension plans in order to minimize the total obligation or cost.
If the pension plans are under funded, companies will need to cover the short fall and for obvious reason companies are unwilling to do that. Moreover, if the company decides to make lump sum payouts or purchase guaranteed annuities for the beneficiary, the company will need to plan for actuarial, administrative and legal costs.
With support of experienced financial advisers, companies may plan strategies that will completely fit into the requirements of your plans and objectives. A thorough analysis will be required to understand and evaluate all the tactical aspects of the plan strategy. Focus on following policies that largely affect your plans:
Investment greatly governs the selection of the plan, asset allocation, implementation and monitoring of the plan. Keep in mind some major considerations like:
- What will be the best initial investment cost that is suitable?
- What type of instruments or bonds will best match to your liabilities?
- What kind of equities will best match to your liabilities?
Funding policies determine the timing and amount of the contribution. Focus on:
- What funding methods are available and which will be most suitable to adopt?
- Risk versus reward analysis at various levels of the contribution
Benefits are important to be evaluated right at the beginning as they allow better administration of the plan and management of legal requirements (if any). Consider:
- Are there any compliance issues that need to be addressed for better estimation of obligations?
- Do you need to amend a pension plan in order to offer unlimited lump sum pay outs?
Finance basically recognizes company’s financial and risk capacity. It includes:
- Evaluating the size of the involved risk of the plan to the company
- Understanding the metrics of risk measurements
- Identifying the appropriate measures for risk settlement
Take Future Into Consideration
Companies need to think deeply and carefully before taking any decision or amending their pension plans. Guidance from qualified financial adviser will assist greatly to reach an idyllic decision for managing frozen pension plans as a financial obligation.