There are a number of games many of us may have grown up with as kids that had an element of “freeze” in it. However, when it comes to pensions, that’s a word that workers who are preparing for retirement don’t want to hear.
GE was among the latest companies to announce a freeze on defined worker pension plans for 20,000 of its employees. In addition, they also froze supplemental pension plans for 700 senior executives and offered buyouts to some 100,000 other employees who had yet begun receiving pension benefits.
There has also been a rash of reports over the past year about the anticipated $4 trillion shortfall facing government employee pension funds. GE’s latest moves reportedly reduced their deficit by $5 billion.
What Does This Mean?
As a leader of a company offering defined pension plans, this is a matter to seriously consider as budgets tighten, pension fund deficits increase, and competition stiffens. Some companies are now opting for defined contribution plans where the company matches employee contributions. Many also have frozen defined worker pensions and/or offered early retirement to their older workers as another avenue to curb rising costs.
When a company is one of those in pension plan transition or about to undergo one, they need to be aware of two things. First, employee morale may be adversely affected but can be managed. Second, attracting future employees may be a bigger challenge without a defined pension plan to offer.
Employees who had been enrolled for years in a defined pension plan had it made. The amount going into the plan was the company money, not theirs, and they knew how much they could expect to receive every month when they retired.
The change to a defined contribution plan suddenly thrusts the burden of planning one’s retirement income on the employee. Most employees in that situation are understandably nervous and will need help with their financial planning.
If a company is going through or planning on a transition to a defined contribution plan, it would be extremely helpful to either have someone on staff trained and knowledgeable to counsel employees or to partner with a financial planning firm that can be available as needed to fulfill that need. This will not only reduce employee stress but also help to improve their loyalty.
Another option such a company might consider is offering lump sums to employees who aren’t yet receiving pensions. Many employees prefer this over a defined contribution plan where they have to “do the math.” Employees anxious and uncertain about their employer’s future would also be more inclined to accept a lump sum rather than risk the company going into bankruptcy in the future.
The third option is letting employees make the choice. Financial counselling will likely still be required regardless of which road a company takes
Whatever a company decides, they need to be sure to communicate clearly and candidly with employees. Doing so will help to ensure future employee confidence and trust.