The Society for Human Resource Management (SHRM) co-signed a joint letter sent on May 8, 2009, to U.S. Secretary of the Treasury Timothy Geithner asking the Treasury department to consider regulatory changes that would provide additional flexibility to organizations struggling to fund their defined contribution pension plans in today’s challenging economic climate.
The letter was signed with 209 leading corporate defined benefit plan sponsors and industry trade associations.
Plan sponsors fund their defined benefit pensions based on the value of plan assets relative to future retirement payouts (liabilities). The 2008-09 recession and steep stock market decline led to a plunge in the value of pension assets. Despite some recovery in asset values during the second quarter of 2009, funding pressures remain acute. According to research by Mercer, an HR consultancy, the estimated total value of U.S. defined benefit pension plan assets as of May 1, 2009, was $1.15 trillion, compared with estimated liabilities of $1.32 trillion—a significant funding shortfall.
In 2006, the Pension Protection Act (PPA) amended the Employee Retirement Income Security Act (ERISA) to require defined benefit plans to begin moving in steps toward fully funded status by the end of 2012. Passage of the Worker, Retiree, and Employer Recovery Act in December 2008 eased the requirements of the PPA by allowing single-employer plans to phase in annual pension funding targets over three years, and it eased the rules for calculating the value of plan assets (see President Bush Signs Pension Funding Relief Law.) Subsequent guidance from the treasury department and the IRS provided additional flexibility regarding actuarial calculations using the “yield curve” of investment-grade corporate bonds to value pension liabilities and determine funding obligations for the plan year—for example, by determining the minimum lump-sum value of a pension annuity (see IRS: Pensions May Use 'Reasonable Interpretation' in Selecting Yield Curve).
The letter to Geithner calls these steps "extremely helpful for companies trying to preserve jobs and benefits in today’s challenging economic climate. But more challenges lie ahead." As the letter explains:
[I]f the market does not fully recover by the end of this year [2009], plans across the country could face 2010 funding obligations that are far greater than the obligations for 2008 or 2009. All of this means that we have much work ahead of us in the very near future to address critical economic issues. If the market does not recover and credit markets remain tight, many companies facing large funding obligations would be forced to lay off workers and reduce benefits, instead of investing in their business and helping the economic recovery.
"There are critical temporary steps that the Department of Treasury could take to provide much needed help," the letter states, and it specifically asks Geithner to support two technical but significant regulatory changes to:
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Permit companies to make new interest rate elections for plan years beginning in 2010. "In order to make it through 2009, many companies feel compelled to elect the full yield curve for 2009," the letter states. "Without such an election, contributions for 2009 would be unaffordable for such companies. However, those same companies may not be able to make business plans on an ongoing basis if they must contend with the unpredictability of the full yield curve. So for business reasons, it is critical that companies be permitted to elect the segment rates for 2010 and thereafter."
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Make funding regulations effective for plan years beginning in 2010, providing an additional year for the national economy to recover. "If final funding regulations are issued soon and are effective for plan years beginning after they are issued, plans with plan years beginning July 1 or October 1, for example, could lose the right to use a reasonable interpretation of the law very soon," the letter warns.
The letter concludes, "As market conditions evolve in the near future, it may also become clear that additional flexibility is needed with respect to the application of the funding regulations. We hope to be able to continue our very constructive dialogue with you as we all try to address the critical issues facing the defined benefit plan system."
Stephen Miller is an online editor/manager for SHRM.
Related Articles:
Multi-Employer Defined Benefit Plans: Only 20% in 'Safe' Funded Status, SHRM Online Benefits Discipline, May 2009
IRS: Pensions May Use 'Reasonable Interpretation' in Selecting Yield Curve, SHRM Online Benefits Discipline, April 2009
Pension Funds Slash Expectations for Investment Returns, SHRM Online Benefits Discipline, February 2009
EBSA Issues Guidance on Required Pension Funding Notice, SHRM Online Benefits Discipline, February 2009
Countering Pension Risk Myopia, SHRM Online Benefits Discipline, February 2009
Pension Plan Deficits Hit Record; Many Revisit Funding Strategies, SHRM Online Benefits Discipline, January 2009
Pension Contributions Set to Triple in 2009, Despite Funding Relief, SHRM Online Benefits Discipline, January 2009
President Bush Signs Pension Funding Relief Law, HR News, December 2008
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