The Chilling Effects of Pension Freezes

The Big Chill is the bittersweet story of what happens when seven college friends, who chased sex, drugs and rock 'n roll in the '60s, try to relive the past.

But here's the message, specific to a column on retirement security: The past is just a goodbye. In 2006, we're watching a story unfold called "The Big Freeze." It, too, is a bittersweet story that defines an entire generation -- but it's the story of what happens when the money runs out. As in, "hard-freeze," meaning no more contributions for current participants, "soft-freeze," meaning less money for current participants, or "partial-freeze," meaning no money at all for certain employees, such as new hires.

Pension plans that go bust hurt, but freezes hurt more. The federal government's Pension Benefit Guaranty Corporation insures the benefits of most participants when plans terminate, usually because of a bankruptcy -- but nobody insures lost benefits because of a freeze.

It isn't just the deadbeats who are freezing pensions, by the way; today, more profitable companies, and large companies, are playing the blame game. The latest list reads like a "Who's Who": IBM (IBM Quote), Verizon (VZ Quote), Alcoa (AA Quote), Sears (SHLD Quote), Sprint Nextel (S Quote).

Behind their decisions: The decline in the equities market since 2000, along with long-term interest rates, tempted companies to lower their costs by redesigning plans and freezing benefits, says analysis from the PBGC last December. The agency studied the most recent pension information filed with the Internal Revenue Service and found that 10% "hard-froze" their benefits in 2003.

But that's only the tip of the iceberg: From 2001 to 2004, the number of Fortune 1000 companies that froze benefits more than doubled, increasing from 5% to 11%, reported the consulting firm of Watson Wyatt last June.

The most recent study, in February, from Mercer Human Resources Consulting, found that the median credit ratings of 15 S&P 500 companies that froze benefits in the past 18 months were slightly higher than the median S&P company, providing another incentive for companies to freeze (higher credit ratings means lower borrowing costs on corporate debt).

Like I said, the past is just a goodbye.