Based on recent date from the Bureau of Labor Statistics, about 20 percent of employees covered by a private-sector pension plan have been affected by a freeze. Employees of Kraft, HSBC, and Time Warner are among those who have had their pension benefits suspended. On the other hand, those employed by state and local governments are usually covered by firmly defined benefit plans.
If your pension has been frozen, how will you adjust your retirement strategy?
First, you have to understand what a freeze on your pension plan means. Pensions are different from 401(k)s in that the former is entirely paid by the employer while the latter is mostly employee funded. Pension plans are usually based on an employee's years of service and highest pay.
Now what happens during a freeze? Well, that depends on the kind of freeze the company is implementing. There's the "hard" freeze, where the pension is literally frozen. Say, for example, a hard freeze is imposed effective immediately. Then the benefit you accrue as of today will be the benefit you will get when you retire. If you're 50 years old now, that translates to 15 more years of service when you won't accrue any more retirement benefits.
A "soft" freeze simply slows down the growth of your benefit based on a new formula. In some instances, your benefit is computed based on your average pay over a number of years rather than on just your highest pay. Or the company may decide to still base your benefit on your highest pay but you no longer accrue years of service. Either way, your pension is worth less.
If you're still young or if you have not been with the company for a long time, you probably haven't earned a lot of benefit. Most firms that freeze pensions will offer a 401(k)-type plan, and you may have time to make the most of it. If you're around five years or less from retirement, you're not so bad off, too. You'll have amassed almost your full potential benefits already.
People in the middle suffer the most during a freeze. Let's say you were 35 when you were hired and a freeze never occurred. That means by the time you are 62, you'll get roughly 43% of your final salary. However, if a freeze suddenly takes place when you hit 50, even if you contribute 6% of your salary and your employer matches it with 3%, you're only going to get around 28% of your final income when you retire.
When a pension freeze is announce, the first thing you need to do is to get in touch with your pension specialist in HR. Ask how much you're entitled to at retirement and be sure you understand the new rules being implemented. If there's a 401(k), understand every detail of the new plan.
Next, compare your projected income and saving against future expenses. Will you have enough to cover everything? You might want to use the program at basic.esplanner.com to reassess your retirement picture.
You may also want to postpone retirement. It will give you more time to save and reduce your reliance on those savings by a few years.
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