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Separate Research Finds Freezes Do Not Increase Stock Price

WASHINGTON, D.C., July 22, 2009—The number of Fortune 1000 firms that have a frozen pension plan increased again this year as companies continue to look for ways to control their retirement benefit expenses, according to an annual analysis by Watson Wyatt, a leading global consulting firm. Meanwhile, a separate study by Watson Wyatt found that freezing a pension plan does not lead to a boost in a company’s stock price.  

The Watson Wyatt analysis found that 190 firms on the 2009 Fortune 1000 list have a frozen defined benefit (DB) pension plan, compared with 169 companies last year and only 45 six years ago. Overall, the rate of DB plan sponsorship in the Fortune 1000 decreased slightly to 61 percent in 2009 from 63 percent in 2004.

The number of DB plan sponsors with frozen plans has been increasing steadily since 2004

Fortune 1000 list year	Number of DB sponsors	Number of DB sponsors with frozen plans	Percentage of DB sponsors with frozen plans
2009	607	190	31.3%
2008	624	169	27.1%
2007	638	138	21.6%
2006	627	113	18.0%
2005	627	71	11.3%
2004	633	45	7.1%

The analysis also found that industries with higher DB plan sponsorship rates, such as utilities and manufacturing, are less likely to freeze a plan than those with lower sponsorship rates. However, companies in industries that have been severely affected by the economic crisis — the financial services and automobile industries in particular — are exceptions. Almost half of the DB plan sponsors in the financial services industry and one-third of the DB plan sponsors in the automobile industry have frozen plans.

“As companies in industries that have suffered through the crisis struggle to keep their heads above water, freezing or closing pension plans may seem like an effective way to cut costs,” said Alan Glickstein, senior retirement consultant at Watson Wyatt. “However, this strategy could come with substantial hidden costs — for employers, who could face increased difficulties in managing the retirement of their workforces, and for employees, who could face reduced retirement resources as a result of a frozen pension plan or a reduced 401(k) match.”

A separate Watson Wyatt analysis found that freezing pensions does not have a positive effect on companies’ market value. The analysis of 82 publicly-traded companies that froze or closed their pension plans between 2003 and 2007 found that there is an insignificant or negative impact on stock prices associated with the announcement of a pension freeze or close. Refuting conclusions of previous research, in 71 out of 82 cases the stock prices of companies did not change significantly in the 23 days around an announcement of retirement plan changes. In cases where such an announcement did have a statistically significant effect, more often than not the employer’s stock price decreased.

“Freezing a plan may produce some accounting gains, but it will not provide companies with long-term cash flow relief — either absolute level or volatility — for many years,” said Mark Warshawsky, director of retirement research at Watson Wyatt. “Also, even if these freezes do lead to savings, there will be no immediate positive effect on firm value. It could even become diminished in the long run if employees begin to view the firm as an uncompetitive employer in light of its shrinking commitment to retirement and its transfer of risk to employees.”

For more information, read the Watson Wyatt Insider article available at: www.watsonwyatt.com/Fortune1000pensionfreezes. 

To view the study of the effect of pension freezes on company stock price published in the Financial Analysts Journal, please visit: www.cfapubs.org/doi/pdf/10.2469/faj.v65.n4.2

For further information, please contact:

Steve Arnoff
703.258.7634
steven.arnoff@watsonwyatt.com

Ed Emerman
609.275.5162
eemerman@eaglepr.com

About Watson Wyatt

Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world’s leading organizations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 33 countries and is located on the Web at www.watsonwyatt.com.