Spotlight on pensions: What a difference a year makes

Companies are taking action to protect the strong-funded levels of their defined benefit pension plans

Employers 05.08.2023 2 Min

For the first time since before the 2008 global financial crisis, corporate defined benefit (DB) pension plans began 2023 either fully funded or overfunded (see chart below). While plan assets have declined significantly due to the fall in both stock and bond values, pension liabilities have fallen even further due to rising interest rates. Some plans have previously found themselves in overfunded positions only to see those surpluses disappear based on financial market movements. Recently, we’ve heard companies in this situation looking to take action today to protect their strong-funded levels.

System-wide Funded Status Hit 100% for the First Time in Over a Decade

Playing the hand you’re dealt: Defined benefit plans are calling, holding or folding

A shrinking minority of companies still offer active DB pension plans—but they haven’t entirely disappeared from Corporate America. A majority of our corporate partners still maintain DB pension plans, although most are frozen in part or full. While a large majority of freezes occurred in the decade 2000‐2010, we are continuing to see companies making the decision to freeze and shift to either a cash balance formula or to a defined contribution plan, such as 401(k) plan.

During the past five years, we’ve seen more than 25 corporate partners freeze their pension plans. A common practice is for a company to announce a DB pension plan freeze to employees at least a year or more before it will take effect. We saw some companies provide employees with multiple years’ advance notice, and a few companies that even announced five- or ten‐year transitions.

Our corporate partners by the numbers:

82%
Still maintain a pension plan, active or frozen

27%
Have an actively accruing pension plan

55%
Of those still accruing are using a cash balance formula

66%
That had a pension plan either closed or froze it, for all participants or for new hires only

40%
That adopted a partial freeze for new hires later froze the plan for all employees

Source: Based on 330 corporate partners as of December 2022.

Employees may have questions when their employer changes retirement plan rules, including who can earn benefits. In our extensive experience supporting companies through similar pension transitions, the top-of-mind questions for employees typically include:

Pension change or freeze:

Will I lose my pension benefit?
- To clear up confusion, emphasize for employees that plan participants can’t lose a benefit they’ve already earned prior to the freeze date
Will I still be able to reach retirement eligibility?
How will this change impact my ability to afford retirement?

Pension termination and payout:

Will my benefit still be protected?
- It’s important for employees to understand the distinction between protection under the Pension Benefit Guaranty Corporation and state guaranty associations
When will I be able to access my pension benefit?
How do I decide whether a lump-sum payment or future annuity makes the most sense for me?

Learn more about our experience with corporate events and how we can help corporate leaders, HR teams and employees navigate pension changes, freezes and terminations.

Read more on this topic in GSAM’s U.S. Corporate Pension Review and Preview 2023 report.

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