PENSION PLAN TERMINATION AND RETIREMENT STUDY

by Edward W. Frees in cooperation with the Society of Actuaries’ Non-Mortality Decrement Task Force

October 29, 2003

Corresponding Author Contact Information:
Edward W. Frees
School of Business, University of Wisconsin
975 University Avenue
Madison, Wisconsin� 53706
Email: jfrees@bus.wisc.edu

Abstract

Employee termination and retirement probabilities affect the valuation of employee benefit plans and thus are of concern to actuaries. To provide timely experience for the profession, the Society of Actuaries’ Non-Mortality Decrements Task Force organized a data collection effort. Thirty-two contributors provided over 1.7 million life years of pension plan turnover data for years 1994-2000. This study summarizes the results of this data collection effort.

Traditionally, the most important determinants of termination and retirement are age, a proxy for attachment to the workforce, and service, a measure of attachment with a firm. This study documents the importance of these traditional quantities using current data and provides (aggregate) tables so that actuaries may quantitatively assess their importance. Moreover, select and ultimate termination tables are provided to assess their combined effect.

For the middle working years, ages 25-55, we find female termination probabilities are higher than males, although the differences are smaller than has been true historically. The differences are insignificant for the younger working years or early service years. Moreover, for ages 55 and older, males have higher retirement probabilities than females.

We also document the effect of several plan characteristics: eligibility for post-retirement health benefits, benefit formula, industry, plan size, hourly/salary and union status, as well as “prior” information. To assess the effects of plan characteristics while controlling for age, service and gender, we use a regression methodology suitable for categorical outcomes, multinomial logit analysis. We find that small plans have slightly higher termination probabilities compared to medium and large plans (plan size is our proxy for employer size). Union hourly plans have lower termination probabilities than salaried plans; in turn, salaried plans have lower termination probabilities than non-union plans.