The Chicago-based HR consulting firm surveyed about 70 U.S. employers with more than 100 frozen defined benefit plans, totaling plan assets of over $50 billion.
About 81% of respondents with DB plans in which benefits accruals are frozen for all participants or eligibility is limited are considering termination strategies that include hedging significant risks (35%), changing investments to reflect the shorter investment horizon to termination (27%), or moving to a more liability-driven-investment approach (19%).
“The majority of plan sponsors wants to terminate their frozen plans quickly, but doesn’t have sufficient assets to do so,” says Cecil Hemingway, U.S. retirement practice leader at Aon. “Survey participants told us they made the design changes associated with closing their pension plans (soft freeze) or ending future benefit accruals (hard freeze). However, without addressing the investment paradigm, they are leaving themselves open to significant future risk,” he adds.
The data also shows that 68% of employers with frozen DB plans thought that funding challenges will lead to cutbacks in hiring and training to make up for the shortfall in plan funding that requires a termination.
Moreover, 75% of respondents who are considering a plan termination within the next five year plan to hire multiple vendors. Despite the cost savings and efficiencies associated with using one vendor, many employers believed that terminating a plan required expertise, specialization, and fiduciary prudent behavior generated by employing multiple vendors.
“Ultimately, plan sponsors of frozen pension plans have to decide whether they want to terminate their plan, start it up again, eliminate or mitigate accompanying risk, or change the benefits provided under the program,” Hemingway says. “Without [an investment] plan, it's highly unlikely that companies will be happy with their pension plans five years from today, and will instead be thinking about what they need to do in order to address the funding shortfalls and economic drain of the plan since it still exists and still has not been addressed.”
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