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More US firms resort to freeze pension plan

July 28, 2009 20:20 IST

The number of American companies freezing their pension plan for employees are on the rise, as the corporates are looking for ways to bring down costs, says a survey.

According to global consultancy firm Watson Wyatt, the count of Fortune 1000 firms that have a frozen pension plan has climbed this year as companies are aiming to control their expenses related to retirement benefits.

The report said that 190 firms on the 2009 Fortune 1000 list have a frozen defined benefit (DB) pension plan, as compared to 169 companies in 2008.

As per defined benefit pension plan, an employer promises a specified monthly benefit on retirement that is pre-determined by a formula based on the employee's earnings history, tenure of service and age, rather than based on investment returns.

"As companies in industries that have suffered through the crisis struggle to keep their heads above water, freezing or closing pension plans may seem like an effective way to cut costs," Watson Wyatt Senior Retirement Consultant Alan Glickstein said.

In a separate report, Watson Wyatt found that freezing a pension plan does not help in increasing the market value of a company.

The analysis of 82 publicly-traded companies that froze or closed their pension plans between 2003 and 2007 revealed that there is an insignificant or sometimes negative impact on stock prices associated with the announcement of a pension freeze or close.

"Also, even if these freezes do lead to savings, there will be no immediate positive effect on firm value.

"It could even become diminished in the long run if employees begin to view the firm as an uncompetitive employer in light of its shrinking commitment to retirement and its transfer of risk to employees," Watson Wyatt Director of Retirement Research Mark Warshawsky said.

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