(September 19, 2012) — Pension stabilization in the recently passed highway bill—more formally known as the Moving Ahead for Progress in the 21st Century Act (MAP-21)—will lower required contributions for single-employer pension plans substantially, according to a research report by Towers Watson.
However, it’s not all good news for pension funds.
“In some ways it makes plan sponsors happy, but it’s not entirely good for them,” Alan Glickstein, a senior retirement consultant at Towers Watson, asserts.
This may be a bad time for the Pension Benefit Guarantee Corporation (PBGC) to put pressure on plan sponsors, who are already facing difficulties. “Hitting them with more PBGC premiums sends a mixed message,” he says.
While the implications of the bill include a change in the interest rate used to measure funding obligations, consequently lowering liabilities as well as contributions, plan sponsors must also battle a large increase in PBGC premiums, which will kick in over the next few years, Glickstein says. He added that the PBGC reiterates that it is currently able to pay what it needs to in order to aid struggling schemes, yet the independent reviews of the PBGC that Congress is demanding suggests that Congress isn’t fully convinced of the need for additional premium revenue.
Meanwhile, under the highway bill, the lowered contributions for plan sponsors will be most acute for plan years 2012 and 2013. Unless interest rates rise, however, required contributions will return to pre-MAP-21 levels in a few years, the Towers Watson report stated. “Before MAP-21, minimum required pension contributions were projected to nearly double between plan years 2011 and 2013—rising from $39.7 billion to $71.7 billion. Had interest rates continued to decline, the funding obligation for 2015 would have reached $105.8 billion,” the consulting firm explained.
Under MAP-21, aggregate pension funding obligations should be substantially lower, with aggregate minimum required contributions projected at $2 billion in 2012 with MAP-21 versus $54.2 billion without it. “Lower pension plan contributions generally imply lower funded levels for the future,” according to the report. “Plan sponsors need to carefully consider their own forecast of interest rates and whether contributing much less for the next few years is in their long-term best interest.”