The latest pension funding relief measure—signed into law by President Obama in August—is unlikely to substantially change plan asset allocation and investment strategy, according to Cambridge Associates.
The 2014 highway bill intended to provide plan sponsors with flexibility, allowing higher discount rates to value a plan’s liability “for the purpose of determining minimum required contributions,” the firm said. An extension of the Moving Ahead for Progress in the 21st Century Act (MAP-21), the law will provide relief until 2021 and dramatically mark down a plan’s liability—up to 15% in 2015, 2016, and 2017.
“Sponsors sensitive to the financial statement impacts of being underfunded or that are seeking to terminate their plan must weigh the near-term consequences of lower contributions,” Cambridge Associates said.
Certain plan sponsors may see new regulations as an opportunity to take on more risk, the report said, largely through reducing fixed income allocations or the duration of bonds in the portfolio.
For these plans considering changes in their strategies as a response to the legislation, the consulting firm recommended a few “plan-specific factors” to review first.
The higher rates under the relief act apply only to calculating mandated contributions, the report said, and not to valuations of potential risk transfers, plan termination, or lump-sum payments.
“Sponsors sensitive to the financial statement impacts of being underfunded or that are seeking to terminate their plan must weigh the near-term consequences of lower contributions,” it said.
The firm also warned the extended relief merely defers required contributions and does not decrease the total amount of contributions over the long term. For underfunded plans, this means higher minimum contributions in the future and a delay in reaching a fully funded status.
Plan sponsors must also take into consideration the increased Pension Benefit Guaranty Corporation premiums under MAP-21—costs that must be paid through “existing assets or from additional contributions.”
Cambridge Associates said given the unpredictable interest rate environment, it is difficult to tell how long the relief will last. “If interest rates rise rapidly, [the higher rates under the relief act] could be replaced by the more marked-to-market 24-month Pension Protection Act rates sooner than expected,” the report said.
Goldman Sachs Asset Management took a similar stance, contending that the new regulation’s limited scope would continue to incentivize de-risking and liability-driven investing strategies. A key focus for many sponsors remains minimizing accounting funded status volatility and its effect on the plan’s balance sheets, the firm said.
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