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President Signs Pension Funding Relief Measure
A "smoothing" provision for funding calculations, but higher PBGC premiums

By Stephen Miller, CEBS  7/6/2012

The two-year omnibus highway transportation bill (H.R. 4348), passed by Congress on June 29, 2012, and signed into law by President Barack Obama on July 6, includes long-sought funding relief for employer-provided defined benefit pension plans. The measure, known as the Moving Ahead for Progress in the 21st Century Act (MAP–21), also raises the premiums that plans pay to the federal Pension Benefit Guaranty Corp. (PBGC).

Under the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 (PPA), defined benefits plans are subject to minimum funding rules that require employers to make contributions to the plan in order to fund the plan’s benefits. When interest rates are low, pension plan liabilities are estimated to be higher and employers are required to contribute more money to meet their minimum funding obligations.

Under the new law (section 40211), employers can put less money into their pension plans by using calculations that allow them to value liabilities using higher interest rates than the prevailing low rates.

For instance, under the law's so-called "smoothing" or rate stabilization provision, the interest rates used to estimate pension liabilities and determine employer contributions, which statutorily have been based on the two-year average of interest rates, will be adjusted so that they are based the average of interest rates for the 25-year period preceding the current year. For that 25-year period, the alternative discount rate is shown below. 

If the calendar year is:

The applicable minimum percentage of the 25-year average rate is:

The applicable maximum percentage of the 25-year average rate is:













2016 and later



“The government’s efforts to keep interest rates artificially low has unintentionally inflated pension plan liabilities, increased funding requirements and forced companies to stockpile cash to satisfy upcoming commitments,” said John Engler, president of the Business Roundtable, an association of chief executive officers of large U.S. companies. “By easing artificial funding obligations, this provision will allow companies to use that money for capital improvements, workforce expansion and to grow the economy.”

Commented James A. Klein, president of the American Benefits Council, an employers group, “We are very gratified that Congress enacted the funding stabilization provision that gives companies a more historically accurate and less volatile method of achieving full funding.” He added, “Employers will now have a somewhat easier time maintaining their pension plans and can therefore devote resources to important job retention initiatives. The council’s Questions and Answers document regarding pension funding stabilization describes the effect of the provision more fully.”

“The Federal Reserve Board’s ongoing low-interest-rate policy has had the unintended effect of making pension funds appear less well funded than they truly are, triggering abnormally high pension liabilities” Klein said. “The interest rate stabilization provision included will help many employer pension plan sponsors navigate our extraordinary economic environment.”

“Lower near-term contribution requirements will be welcomed by many plan sponsors who faced significant increases in cash contributions as they struggle to recover from the recent financial crisis, especially for sponsors with liquidity issue,”
said Jacques Goulet, U.S. leader of consulting firm Mercer’s retirement, risk and finance business.

However the Pension Rights Center, an advocacy group for pensioners, expressed concerns over the lower funding requirements. "We believe that Congress must strike the right balance between giving employers a break on making pension contributions and protecting the pension fund and workers’ and retirees’ long-term security," the group said. "We are concerned that giving employers a pass from making contributions in today's low-interest economy might exacerbate the problem of underfunded plans."

The pension relief provided could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014, according to Mercer estimates. On the other hand, the bill doesn’t change plan sponsors’ underlying pension obligations. It merely gives them more time to address their plans’ current funding shortfalls. 

The aggregate funded ratio for pension plans sponsored by S&P 1500 companies was 74 percent as of June 30, 2012, Mercer reports, down from 75 percent as of Dec. 31, 2011.

Pension consulting and actuarial firm Milliman Inc. is recommending that most of its clients use the new rates to calculate their minimum funding obligation for 2012 but to contribute at about the same level they did in 2011. With that strategy, employers can avoid a 'bulge' in pension underfunding after 2013 when the positive effects of the new rates begin to phrase out, the firm advises.

PBGC Premiums Raised

Under the law (section 40221), PBGC premiums will rise substantially for all plans, and underfunded plans, in particular, will incur higher variable-rate premiums:

PBGC flat-rate premiums will increase from $35 to $42 per participant in 2013 and to $49 per participant in 2014, and then will be indexed for inflation.

• Variable-rate premiums, which still will be calculated by current interest rates, will increase by a formula based on a plan’s funding level. For plan years beginning after 2012, the rate for variable-rate premiums ($9 per $1,000 of unfunded vested benefits) is indexed, and the per-participant variable-rate premium is subject to a limit ($400 for 2013 with indexing thereafter). In addition, the rate for variable-rate premiums per $1,000 of unfunded vested benefits is increased by $4 for 2014 and another $5 for 2015.

Premiums also will increase for employers who pay into multiemployer plans by $2 per participant for 2013.

While supporting the lowered pension funding requirements, the Business Roundtable expressed disappointment in the bill's provision increasing plan sponsors’ annual payments to the PBCG. “Characterizing [the increased PBGC payment] as a ‘premium’ does not change the fact this is a new tax on businesses,” Engler said. “This will amount to an unnecessary cost to employers at a time when the PBGC has said it will be able to guarantee benefits for the foreseeable future.”

“As much as we appreciate the inclusion of pension funding stabilization, we strongly disagree with the decision to impose an additional $9 billion in pension plan premium hikes,” added Klein. “The increase in insurance premiums paid to the PBGC effectively acts as a tax increase on companies that sponsor these plans for their employees.” Earlier this year, the council prepared a Myths and Facts document describing its view of the flaws in the PBGC’s premium increase proposal.

All plan sponsors face significantly higher PBGC premiumsin particular variable rate premiums for underfunded plans will more than double by 2015,” said Mercer's Goulet. Thus plan sponsors have a strong incentive to keep their plans well funded, which means many will choose to contribute more than the minimum required under the bill.” 

Concurred John Wendeln, a partner in law firm Thompson Hine’s employee benefit and executive compensation group, “Companies will need to analyze whether the slower funding offered by the act is advisable due to higher PBGC premiums for underfunded plans.”

Advocate's Office Established

In another pension-related provision (section 40232), the law establishes a new Participant and Plan Sponsor Advocate office within the PBGC, a move cheered by the Pension Rights Center. "This new office is tasked with making sure participants receive all of the benefits and protections they are entitled to under the law," the group noted. "If appropriately staffed and funded, the advocate could provide 'one-stop shopping' for participants trying to navigate the maze of government offices with pension responsibility."

Funding Retiree Health Benefits

Klein commended lawmakers for including a provision extending the ability of employers to transfer excess pension assets to fund retiree health benefits (section 40241) and expanding the provision to allow transfers for retiree life insurance (section 40242).

“These transfers facilitate the continuation of retiree health insurance for countless retirees,” Klein said. Expanding this provision to allow transfers to pay the costs of retiree life insurance will also help foster personal financial security for seniors.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Funding Decisions Loom for Pension Plan Sponsors, SHRM Online Benefits, May 2012

2012 Pension Contributions Expected to Rise 30% to 40%, SHRM Online Benefits, March 2012

Pension Funding Volatility Remains Top Priority, SHRM Online Benefits, February 2012

Five Key Pension Risk Management Tips, SHRM Online Benefits, January 2012

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