How Much Does a Frozen Pension Grow Each Year?

A frozen pension, within defined benefit plans, means future benefit accruals typically cease, but the existing accrued benefit does not become stagnant. This type of pension plan preserves benefits earned up to the freeze date, which can continue to grow. This article clarifies how these accrued benefits can increase, how that growth is determined, and how individuals can track and claim their pension. Understanding these mechanisms is important for individuals whose retirement plans include a frozen pension.

Understanding a Frozen Pension

A pension is “frozen” when an employer stops or significantly reduces new benefit accruals for plan participants. This means employees no longer earn additional pension benefits based on future service or salary increases. However, benefits earned up to the freeze date remain intact and protected. Employers often freeze pension plans to manage costs, reduce financial liabilities, or transition to defined contribution plans like 401(k)s. This shifts investment risk and responsibility for retirement savings to the employee.

There are different types of pension freezes. A “hard freeze” halts all future benefit accruals, fixing the pension benefit amount as of the freeze date. While no new benefits are earned, the existing amount may still grow through specific mechanisms. A “soft freeze” may allow limited future accruals, perhaps at a reduced rate, or may only close the plan to new employees while current participants continue to earn benefits.

In a hard freeze, accrued pension benefits will not increase based on additional years of service or salary raises. However, the employer cannot retroactively reduce benefits already earned. The plan continues to operate, and previously accrued benefits are generally insured by the Pension Benefit Guaranty Corporation (PBGC). This distinction is important for understanding how a frozen pension, particularly under a soft freeze or with specific plan provisions, can still increase in value.

How Accrued Benefits Increase

Even after a pension plan is frozen, accrued benefits can still increase through several mechanisms, depending on the plan’s specific terms. The way a frozen pension grows is determined by the type of defined benefit plan it is.

For cash balance plans, a type of defined benefit plan, the accrued benefit is often a hypothetical account balance. This account receives “interest credits” annually, contributing to its growth. The interest crediting rate can be fixed, such as 5%, or variable, tied to an external index like the 30-year U.S. Treasury yield. These interest credits are predefined by the plan document and are not tied to the plan’s actual investment performance.

Traditional defined benefit plans, which promise a monthly annuity at retirement, may include “actuarial increases” if a participant delays receiving their benefit past the normal retirement age. This increase compensates the participant for the shorter period over which payments are expected. For instance, if a participant defers a $500 monthly pension from age 65 to 66, the monthly benefit might increase to $562. Federal regulations mandate actuarial increases for benefits delayed beyond age 70½.

Some frozen pension plans may also include “Cost-of-Living Adjustments” (COLAs). These adjustments help maintain the pension’s purchasing power by accounting for inflation. COLAs are often linked to inflation indexes, such as the Consumer Price Index (CPI), and can be applied annually. While less common in private frozen pensions, a COLA provision can significantly increase the real value of an accrued benefit over time.

Key Factors Affecting Growth

The growth rate and method for a frozen pension are determined by the plan’s official documents. The Summary Plan Description (SPD) outlines how benefits are calculated, how they may increase, and other features. This document serves as the primary source of information for participants regarding their pension benefits.

For plans using interest credits, the interest rate index chosen by the plan sponsor influences growth. If the plan’s crediting rate is variable, linked to an external benchmark like Treasury yields, fluctuations in these market rates impact the accrued benefit’s growth rate. The plan document specifies whether the rate is fixed or variable and the precise index used.

For traditional defined benefit plans, the participant’s age and the length of benefit deferral significantly influence the actuarial increase. The longer a participant delays receiving benefits past the normal retirement age, the greater the actuarial increase applied to their monthly benefit. Plan rules dictate the actuarial factors, including interest rates and mortality tables, used to calculate these increases.

Federal regulations, such as the Employee Retirement Income Security Act of 1974 (ERISA), set minimum standards for pension plans, including benefit accrual and vesting requirements. While ERISA ensures basic protections, the specific terms for growth beyond these minimums are established by the plan. Internal Revenue Service (IRS) regulations mandate actuarial increases for employees who retire after age 70½ in certain defined benefit plans. These regulations ensure growth for delayed benefits.

Calculating and Claiming Your Pension

Understanding the growth of a frozen pension involves gathering information from the plan administrator. Participants typically receive annual benefit statements that detail their accrued benefit and may provide projections of its value at retirement, reflecting any applicable growth. Reviewing these statements helps individuals track their pension’s progress.

Information regarding a specific frozen pension plan, including its growth mechanisms and current value, can be obtained from the plan administrator. This is often the human resources or benefits department of the former employer. The plan administrator can provide copies of the Summary Plan Description (SPD), a document explaining how the plan works, including eligibility, benefit calculation methods, vesting schedules, and how to claim benefits.

When an individual becomes eligible to receive their pension, typically at retirement age, they will need to apply for benefits. This usually involves submitting an application form to the plan administrator. Pension plans offer various payout options, most commonly monthly annuity payments for life, or a lump sum payment. Annuity options may include a single life annuity or a joint and survivor annuity, which provides payments for the participant’s lifetime and then for a surviving spouse.

If a lump sum option is available and chosen, the entire pension benefit is paid in one single payment. Pension payouts are generally taxable as ordinary income. If a lump sum is distributed directly to the participant, 20% may be withheld for federal income taxes. To defer taxes, a lump sum can typically be rolled over into an Individual Retirement Account (IRA) or another qualified retirement plan, avoiding immediate taxation and potential early distribution penalties if the recipient is under age 59½.