Class, according to an article posted by Towers Watson (2009)-a leader in global
ID: 1214908 • Letter: C
Question
Class, according to an article posted by Towers Watson (2009)-a leader in global professional services- from 2008 to 2009 there was a 4% increase in the number of Fortune 1000 company's freezing their Defined Benefit pension plans. This was due to the failing economy especially in companies such as the automotive and financial segments. It explains how a lot of companies in the last 10 years are moving away from Defined Benefit pension plans to Defined Contribution Plans to stay ahead of competitor plans, reduce costs and to overcome financial difficulties. The new plan shifts the contributions and responsibilities to employees in order to relieve the employer of the obligations. Only 42% of Fortune 1000 companies still provide a Defined Benefit plan compared to the majority that have shifted. What are the short and long-term ramifications of such choices?
Explanation / Answer
Noted that from 2008 to 2009 there was a 4% increase in the number of Fortune 1000 company's freezing their Defined Benefit pension plans. The reason being a majority of the US companies accusing of stiff competition in overseas market and at home from companies that are not sponsoring defined benefit plans.
Many pension plan freezes have occured since they have become more costly and risky, with no relief on the horizon.
Companies enumerate some major goals to be achievd by this freezing -
Freezing a defined benefit plan may provide some immediate cost savings but it neither fix unfunded liabilities nor eliminate cost volatility. Instead, these plans remains subject to the interest rate risk and and demographic risks. Moreover, the frozen plan is still subject to all of the same minimum funding, compliance, administrative and fiduciary requirements as an ongoing defined benefit plan.
In the long term, a plan sponsor should evaluate its long term strategies for handling its frozen pension