What Is a Frozen Pension Plan?

Quick Answer

A pension freeze is a change in how pension benefits are accumulated. When a pension plan is frozen, benefit accrual is limited or suspended, and new employees can’t enroll in the pension plan.

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A pension freeze can significantly impact your retirement plan. A company may freeze pensions, which limits new enrollment and the accumulation of new benefits. If your employer announces a pension freeze, knowing your options can help you navigate the transition and continue to prepare for retirement.

What Are Pension Freezes?

A pension fund guarantees a steady stream of fixed, monthly retirement benefits based on your years of service, earnings or both.

Under a pension freeze, new benefit accumulation is limited or halted. Current employees lose some or all of their ability to earn additional pension benefits, and new employees aren't able to enroll in the pension plan. Fortunately, existing benefits are typically safe.

Over the past few decades, a number of companies have frozen pensions, effectively eliminating this retirement option for new employees. Companies use pension freezes to improve cash flow, reduce debt or minimize future payment obligations.

In January 2024, 3M announced a freeze on its U.S. pension plans for nonunion employees as the company shifts to a 401(k) plan. Employees eligible for pensions will continue to accrue benefits until the freeze becomes effective at the end of December 2028.

How a Pension Freeze Works

There are two ways a company can freeze pensions: a hard freeze or soft freeze. Both limit pension accruals, but have a different effect on employees' ability to earn benefits.

Hard Freeze

In a hard freeze, all future benefit accruals are frozen and you won't earn any additional benefits after the effective date. Benefits you've already accumulated aren't affected by the freeze, meaning you won't lose what you've already earned. This applies even if you're not vested when the pension freeze becomes effective. You can continue to earn vesting credit as long as you're employed by the company.

Soft Freeze

In a soft freeze, future benefit accruals are reduced, but not halted. In some cases, plan participants may still earn benefits, but at a reduced rate on a salary- or service-based formula. For instance, the pension plan may be closed to new employees only, but current employees still accrue benefits. Similar to a hard freeze, existing benefits aren't affected.

Pension Termination vs. Pension Freeze

When a pension is terminated, the company completely closes or discontinues its pension plan, sometimes shortly after a freeze becomes effective. A company may terminate its pension plan because of financial difficulties, such as if they're facing bankruptcy and can't make pension payments.

Unlike a pension freeze, with a pension termination, the benefits do not remain intact. The company is required to completely pay out accrued benefits or transfer them to an annuity.

Pension Freeze vs. Pension Termination
Pension Freeze Pension Termination
Plan continuation Yes No
Benefit impact No immediate effect on accrued benefits Benefits may change or be distributed
Benefit accrual Suspended or reduced Suspended
Advanced notice requirement 45 days 60-90 days

A company's pension plan can be terminated by the Pension Guaranty Benefit Corp. (PBGC), a government agency that oversees pension plans and insures pension benefits. When the PGBC terminates a pension, they publish a notice in the newspaper and send you information once they take over the plan.

What to Do if Your Pension Is Frozen

An employer can freeze their pension plan at any time as long as they provide you notice at least 45 days before the freeze effective date. If you're already receiving benefits, a pension freeze won't affect you.

Here are steps to take if your pension is frozen:

  • Request a statement of your benefits. If your employer doesn't automatically provide a statement of your frozen benefits, request it from your human resources department.
  • Find out what your employer is offering. Your decision should consider the alternative retirement benefit options from your employer.
  • Consider a lump-sum payout. While taking a lump-sum payment gives you more control over your funds, the payout may be taxed at your regular income tax rate. In addition, you also face a 10% early withdrawal penalty if you're under age 59½.
  • Roll over the account into an IRA. If you take a lump-sum payment, you can opt to rollover into an individual retirement account (IRA). A direct rollover would allow you to avoid tax penalties on the payout and instead pay taxes when you start making withdrawals.
  • Switch to a 401(k) plan. Take advantage of your company's 401(k) plan especially if they match contributions or offer profit sharing.
  • Do nothing. Your benefits may remain in the pension plan until retirement. You won't accrue any new benefits, but you can still earn interest on the benefits you've already earned.

The Bottom Line

You can prepare for changes to your pension by contributing to your retirement savings separately. For instance, you can contribute to your company's 401(k) or to an IRA. If you're worried that you don't have enough money to put towards retirement, take a closer look at your expenses. You may be able to eliminate some bills to free up more money for savings. Contributing even a small amount is better than nothing and puts you in a good position to handle a pension freeze.