When a corporation freezes its pension plan, it will no longer allow new workers to participate in the plan, and the benefits offered to those already enrolled in the plan may no longer rise.

What Does It Mean to Freeze Your Pension?

When a pension is frozen, the value of the pensions of the employees who are now covered by the plan will no longer rise. This might apply to part or all of the workers covered by the plan. Any new workers not already included in the plan's coverage are not eligible to enroll in the plan under any circumstances. Nevertheless, the corporation is obligated to respect any benefits already accumulated by retirees and those participants who are still active. General Electric (GE) stopped accepting new participants into their retirement plan in 2012, and in 2019 they stopped increasing their benefits for the 20,000 already enrolled workers. Additionally, GE made a one-time cash payment buyout offer to the 100,000 retirees who had not yet begun collecting their payouts.

How the Freeze on Pensions Operates

A corporation may opt to put a freeze on its pension plan in several different broad ways, including the following:

Hard Freeze:

A hard freeze indicates that the plan will no longer cover any new workers and that existing employees will no longer experience any increases in their benefits due to the plan.

Soft Freeze:

A gentle freeze is another option that a corporation has. The most fundamental aspect of a soft freeze is that it does not let newly hired workers join the plan, but it does permit presently covered workers to continue receiving benefits. There is also the possibility that active participants may no longer be able to accumulate benefits when a soft freeze is implemented; nevertheless, the value of the benefits that have already been earned will grow in proportion to the workers' pay. Sometimes, the rewards of just some existing participants are put on hold while others continue to accumulate benefits. Some people refer to this as a partial freeze.

Pension Plan vs. Freezing One

There are several ways in which a termination is distinct from a freeze. The most notable distinction is that once a pension is terminated, it is no longer in effect as a financial vehicle. When a corporation wants to end a plan, it has to pay out all the benefits accumulated. It can do this by providing a one-time payment or paying an insurance company to take over the responsibility of making payments. The Pension Benefit Guaranty Corporation may make up the difference if the pension fund is insufficiently financed and cannot pay all of the benefits accumulated.

Why Would a Company Put a Hold on Pension Payments?

F freezing a pension plan is a common strategy businesses use to save money and minimize their overall plan-related obligations. A corporation is responsible for paying any benefits accrued in addition to the direct expenditures associated with the management and operation of a pension plan. This indicates that the corporation will be responsible for any investment losses incurred by the plan's assets. In contrast, when an employer offers a defined contribution plan such as a 401(k), the corporation is relieved of any responsibility to provide a promised benefit over and above the amount of the matching contribution. Participants in the plan take on the responsibility for the investment risk.

What Should You Do If Your Pension Is Frozen

If your pension is put on hold, you will need to rethink your preparations for when you retire. Although you will continue to get any benefits you have previously earned, you won't be able to count on the full amount of the pension payment you had anticipated earning when you first began working there. This is because the value of the pension payment has been reduced. Before you decide whether or not to take a lump sum payment given to you, you should first examine how you will put that money away so that it will continue to be a source of income after you reach retirement age. You may move the money into an individual retirement account (IRA) so that it can continue to grow tax-free. If you opt to receive a lump amount instead of receiving payments from an annuity, you will need to choose how you would invest the money.

To compensate for the decrease in the amount of money you anticipate receiving from your pension, you will also need to make larger contributions to your retirement savings. If your employer offers a defined contribution plan like a 401(k), you should consider raising the amount you contribute to the plan. At the very least, check to see if your contributions are sufficient to qualify you for any matching funds your company offers.