Federal pension funding relief may offer help for U.S. corporations with defined benefit plans, but a report by Towers Watson shows that only a quarter of companies say they plan to use it.
The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 signed by President Barack Obama on June 25 allows companies with underfunded plans to amortize their funding shortfalls for any two years between 2008 and 2011, either over a 15-year period or by making interest-only payments for two years followed by seven years of amortization. DB plans are usually required to amortize over seven years.
The Towers Watson analysis found that without the legislation, aggregate minimum required contributions would have been $78.4 billion in 2010, $131 billion in 2011 and roughly $159 billion in both 2012 and 2013. But under the pension relief legislation, contributions over five years would be reduced by a total of between $19 billion and $63 billion, depending on which of the two provisions employers choose.
“The analysis noted that for employers with immediate cash-flow concerns, the seven-plus-two-year option for 2010 and 2011 may be the better choice to concentrate the relief, while the 15-year amortization rule spreads the relief more evenly over a longer period,” according to the news release.
The analysis does not consider the impact of so-called “cash-flow rules, which require extra pension contributions if executive compensation or dividend payments are too large, and could cause some employers to forgo the relief offered,” according to the news release.
The news release notes that a July survey of 137 Towers Watson consultants on behalf of 367 employers revealed that 25% of plans are likely to elect either of the relief plans and 60% of those who do plan to opt for the 15-year amortization option.
Mark Warshawsky, director of retirement research at Towers Watson, said in a telephone interview that provisions in the plan that limit cash flow and executive compensation for companies using the relief plan could be a sticking point for many companies.
“That puts constraints on businesses and they don’t like that,” he said.