Nowadays, there is strong competition in world economy and you can see the reactions of that competition in various
places. Companies are making huge cost cuttings and they are taking every possible step to maintain company in profits.
Among so many reactions one reaction that is faced by employs those are close to retirement is pension freeze. Let's
discuss what are frozen pension and how can they affect employees?
Frozen Pension Plan Information
Under Frozen Pension Release plan, the employees that are
close to retirement their pension is freeze by the employers, in order to benefit company, which means from now on they
have no share in additional benefits. They can only take benefits until the date of freeze, although except that
everything remains same and they can continue work in the company. Most companies that freeze employs pension give
reason for 401 (k) plans. Employs can use Frozen Pension Release; it is not one hundred percent safe, but it enables
them to get a bit relief.
A Look At Various Types Of Frozen Pension Plans
Generally there are two types of frozen plans, one is soft freeze and other is hard freeze. Under soft freeze, employs
working years are not affected although they have to lose a little amount. In short, the participants have to lose a
particular amount in order to compensate, although there are no effects on the number of years. Employers can also use
an alternative of this plan to freeze out some particular employs. Under hard freeze employs will not receive any
benefit that adds to pension plans after their freeze. It means an employ can work for another 10 years, but he/she will
not get any pension benefit during those 10 years. So, as its name suggests this plan is really hard on employs.
Freeze Vs Termination
Some people confuse freeze pension with termination, these two are entirely different as in frozen plan employs continue
to work and deserves every right for their Pension till the frozen date. Besides there are also chances that his Frozen
plan may get unfrozen. Conversely in termination pension plan employs has nothing left? However, if the plan is
under-funded a few benefits, then employs can claim their benefits to federal pension insurance plan. In case, the plan
is over-funded, then employs have to visit an insurance company and they will take over the amount of benefits.
How can frozen pension plan affect employees?
If a person is in his 50s and he will get retired after 5 years, but before that he gets freeze, then he will have to
face strong financial crisis. These plans initially terminate a person's retirement plans. It affects a person in big
way. Let's understand this with an example.
A person of age 60 years old, working in the company from last 20 years, his annual income is $50, 000 and he will get
retired after five years. Assume 3% of annual raise (final salary will be 54, 636). Now if he is not affected by freeze,
then his retirement benefit will be calculated as 1% of final salary (0.01 x $54, 636) by number of his working years
(20 years + 5 years), in this way his total retirement benefit will be (0.01 x $54, 636 x 25 years) $13, 659. On the
other hand, if he is affected by freeze, then his retirement benefits under same circumstances will be calculated as,
final salary ($50, 000), number of working years (20 years) in this way his retirement benefit will be (0.01 x $50, 000
x 20 years) $10, 000. Freeze really affects the employs as you see there is huge difference and this difference has
occurred because of freezed number of years and freezed final salary.