SOA: 2021 Smoothing Stoppage Calls for Forward-Thinking Initiatives

Although smoothing rates suggest single-employer pension plans have been fine, future restrictions could cause issues.

The Society of Actuaries (SOA) last week released a document chronicling research on its US single-employer pension plan contribution indices, noting that the 2014 total funding liability for these plans of $1.9 trillion was 98% funded, with an unfunded liability of $30 billion as of 2014. The database was pulled in October 2016.

The above funding percentage was reflected by the smoothed bond rates. When assessed using unsmoothed, high-quality corporate bond rates, the liability is actually estimated to be $2.4 trillion, and when assessed using the market value of assets, the system was 91% funded, with an estimated liability of $218 billion. While this is mostly positive news for now, there are some looming signs of uncertainty come 2021, when the smoothing effect will become more restricted, eventually fading away completely. This will cause the discount rates to drop, increasing liability.

The Pension Protection Act, the initial law regarding the smoothing was passed in 2006 and implemented in 2008. There was little smoothing in the initial law, but in the wake of the financial crisis, congress allowed for more smoothing in a relief effort. “That was about the time when interest rates started to drop and everything tanked,” said Lisa Schilling, retirement research actuary with SOA. “As an effort to smooth out the extreme shock of the way it turned out, with the extra contributions at the same time that the economy was in a down surge, Congress put in this smoothing and it was intended to be phased away. At that time, people thought interest rates were going to come back up, and for whatever various reasons, they didn’t.”

Schilling says that the varying issues caused Congress to re-up the smoothing of those discounts rates three separate times.

Although 2021 seems far away, Schilling suggests those that are not planning ahead already should begin working immediately with their actuaries to adjust their budget plans to avoid taking a big hit in the future.

“That’s probably the single-biggest thing to do,” she said. “Combine that with the tradeoff of the more money you put in, the better funded you are in the future. If a plan is being close to 100% funded or is 100% funded on the basis of the smoothed rates, but not so on the market rates, I could imagine that could well play into the kind of investment strategies one might want to undertake,” she said. “Each plan needs to be looked at on their own and get their actuaries on the investment. They need to look at the whole picture, not just one piece at a time.”

The research was conducted using the Department of Labor Form 5500 database. The full SOA report can be viewed here.

Photo by: Natee127

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