To what extent are DB pension plans frozen, and what are the  characteristics of such freezes? Frozen Plans Affect about One-Fifth of Active DB Plan Participants

Overall, an estimated 3.3 million active participants in our study  population—or 21 percent of all active participants in the private, single- employer DB system—are affected by reported freezes. Under hard freezes, future benefit accruals cease for  active participants. In contrast, soft freezes may reduce future benefit  accruals for some or all active participants. Larger sponsors, those with 10,000 or more total participants,  are significantly less likely than smaller sponsors to have implemented a  hard freeze, with only 9.4 percent of plans under a hard freeze among  larger sponsors compared with 25.4 percent of plans under a hard freeze  among smaller sponsors. Of sponsors in the study population with one or more frozen plans,  83 percent offered a replacement retirement savings vehicle to affected  participants in their largest frozen plans. An additional 6 percent of sponsors froze  plans under extenuating circumstances that preclude the offering of a  replacement plan (such as, a firm merger, bankruptcy, plant closure,  multiple employer plan, or new-employee-only soft freeze). The remaining 13 reasons range in  prevalence from 54 percent responding that “plan was frozen in  anticipation of replacing it with an alternative retirement plan” to  12 percent for “other reason.”
About two-thirds of sponsors with frozen plans reported at least some  level of confidence that their largest frozen plan was reasonably well- funded at the time of freeze. However, there are some limitations to these data. The anticipated outcome for a  sponsor’s largest plan varies significantly by the type of frozen plan. Plan Freezes Have Various Implications for Key Stakeholders

The prevalence of frozen DB plans today has different implications for key  stakeholders in the single-employer DB system—plan sponsors,  participants, and the PBGC. For  example, from 1990 to 2006, total annual standard terminations averaged  about 7 percent of insured single-employer plans. For active plan participants, plan freezes imply a possible reduction in  anticipated retirement income. Ultimately, no matter what the impact on its net financial position, the  freezing of plans and the exiting from the single-employer DB system by  sponsors do not indicate future plan growth for the PBGC. Given the prevalence of plans that are currently frozen and the  relationship between plan freezes and plan termination, the shrinking of  the single-employer insurance program plan base seems likely to continue. GAO staff who made contributions are listed in appendix V.

Appendix I: Frozen DB Plan Briefing Slides

	GAO Freeze Survey: Sampling Summary

Liabilities (in billions)

		Finding: Plan Freezes Are a Common Occurrence

	For Sponsors’ Largest Plans, Just Over Half Were Frozen During or After 2005

		Finding: Most Sponsors Who Froze a Plan Made an Alternative Replacement Plan Available

	Finding: Sponsors Froze Plans for a Variety of Reasons

		Top reasons sponsors reported for freezing a plan were:

– Cost of annual contributions needed to satisfy funding requirements  and their impact on cash flow (72 percent) – Unpredictability/volatility of plan funding requirements (69 percent)

	Finding: Sponsors of DB Plans Uncertain About Future Course of Action

		For those sponsors with frozen plans:

	Despite the widespread prevalence of plan

freezes, a rise in terminations has yet to  materialize (notably among the largest  plans)

		A freeze may imply:

	Freezes likely to have a slightly positive

Appendix II: Scope and Methodology

To achieve our objectives, we conducted a survey of sponsors of defined- benefit (DB) pension plans. We limited our study to this  population of 7,804 larger sponsors (our study population) because it  would be informative about the vast majority of covered participants and  we expected a higher success rate in locating, contacting, and obtaining  responses from this group than would have been obtained from the  smallest sponsors. Despite these differences in approach and methodology, some may wish to  compare PBGC’s estimate of 15.9 percent of plans were hard frozen in  2006 and our study population estimate of 23.3 percent of plans as hard  frozen among sponsors with 100 or more participants in all plans.
Why GAO Did This Study

Private defined benefit (DB) pension plans are an important source of retirement income for millions of Americans. However, from 1990 to 2006, plan sponsors have voluntarily terminated over 61,000 sufficiently funded single-employer DB plans. An event preceding at least some of these terminations was a so-called plan "freeze"--an amendment to the plan to limit some or all future pension accruals for some or all plan participants. Available information that the government collects about frozen plans is limited in scope and may not be recent. GAO conducted a stratified probability sample survey of 471 single-employer DB plan sponsors out of a population of 7,804 (with 100 or more total plan participants) to gather more timely and detailed information about frozen plans. We have prepared this report under the Comptroller General's authority as part of our ongoing reassessment of risks associated with the Pension Benefit Guaranty Corporation's (PBGC) single-employer pension insurance program, which, in 2003, we placed on our high-risk list of programs that need broad-based transformations and warrant the attention of Congress and the executive branch. Frozen DB plans have possible implications for PBGC's long-term financial position. This report examines (1) the extent to which DB pension plans are frozen and the characteristics of frozen plans; and (2) the implications of these freezes for plan participants, plan sponsors, and the PBGC.

What GAO Found

Frozen plans are fairly common today, with about half of all sponsors in our study population having one or more frozen DB plans. Overall, about 3.3 million active participants in our study population, who represent about 21 percent of all active participants in the single-employer DB system, are affected by a freeze. The most common type of freeze is a hard freeze--a freeze in which all future benefit accruals cease--which accounts for 23 percent of plans in our study population; however, an additional 22 percent of plans are frozen in some other way. Larger sponsors (i.e. those with 10,000 or more total participants) are significantly less likely than smaller sponsors to have implemented a hard freeze, with only 9 percent of plans under a hard freeze among larger sponsors compared with 25 percent of plans under a hard freeze among smaller sponsors. The vast majority of sponsors with frozen plans in our study population, 83 percent, have alternative retirement savings arrangements for these affected participants, but 11 percent of sponsors do not. (An additional 6 percent of sponsors froze plans under circumstances that preclude a replacement plan.) Plan sponsors cited many reasons for freezing their largest plans but most often noted two: the impact of annual contributions on their firm's cash flows and the unpredictability of plan funding. Sponsors of frozen plans generally expressed a degree of uncertainty about the anticipated outcome for their largest plan, but sponsors whose largest plan was hard frozen were significantly more likely to anticipate plan termination as the likely plan outcome. The implications of a freeze vary for sponsors, participants, and PBGC. For plan sponsors, while hard freezes appear to indicate an increased likelihood of plan termination, a rise in plan terminations has yet to materialize. For participants, a freeze generally implies a reduction in anticipated future retirement benefits, though this may be somewhat or entirely offset by increases in other benefits or a replacement retirement-savings plan. However, because the replacement plans offered to affected participants most frequently are defined contribution, the investment risk and responsibility for saving are shifted to employees. Finally, plan freezes may potentially improve PBGC's net financial position, but the degree to which it is accompanied by sponsor efforts to improve plan funding is unclear. In any event, the shrinking of the single-employer pension insurance program plan base seems likely to continue.