A road map for effectively managing a frozen pension plan

Pension funding reform, an aging workforce, low interest rates and uncertain investment returns have put significant financial pressures on pension plan sponsors. To cope, more organizations are choosing to freeze their plans—either closing them to new entrants or discontinuing accruals for some or all of their employees.

While freezing a plan limits the future growth of its liability and may help alleviate some risk, a frozen plan still requires significant attention and resources. Plan sponsors may be required to continue making cash contributions to meet the plan’s target liability, and the same market fluctuations and interest rate risks that affected the active plan will continue for the frozen plan.

In addition, the need remains for accounting, reporting, compliance, fiduciary and investment oversight, as well as participant administration and communications. These responsibilities can strain resources—particularly if the organization has already introduced another retirement savings program, such as a defined contribution plan, and has to cover the costs of those enhanced benefits.

For some plan sponsors, the desired result is to eventually remove the plan and its associated liability from the company’s books. But the cost of immediately terminating a pension plan is often higher than most companies can cover with current plan assets. For others, a well-managed frozen pension plan can provide predictable expense levels, or even pension income, to help boost a company’s earnings. In these cases, plan sponsors may opt to maintain their plan over a longer time horizon.

Following are steps to consider when creating a strategy for assets to outperform liabilities and managing plan costs and risks over the desired time horizon.

Step 1: Evaluate goals and priorities, including time horizon, cash constraints and earnings implications.
Step 2: Understand the liability and other key pension metrics through the balance sheet, ERISA funding liability and termination liability.
Step 3: Implement an asset-liability investment approach that helps limit contribution volatility and manages toward the funding target.
Step 4: Implement and monitor a revised investment strategy.

Talk with your Bank of America Merrill Lynch representative about strategies to help manage your pension plan and company goals.