As executives at corporate defined benefit plans figure out whether they gained more than they lost in pension legislation approved by Congress June 29, one clear winner emerges: Uncle Sam.
If plan executives take advantage of the bill's longer-term interest rates for calculating pension funding obligations, giving them a chance to save on contributions in the short term, the federal government could see tax revenue increase more than $9 billion over 10 years as tax-exempt contributions dip.
Another $9 billion will flow to the Pension Benefit Guaranty Corp. through increased premiums.
“The government wins both ways,” said Bruce Cadenhead, partner and chief actuary for Mercer's U.S. retirement, risk and finance business.
As for pension funds, Mr. Cadenhead noted: “Some employers really see no benefit, while there will be others, especially those struggling to make minimum required payments, who think the near term cash (benefit) is significant.”
The bill, Moving Ahead for Progress in the 21st Century Act, or MAP-21 that included the pension changes was signed by President Barack Obama on July 6.
The bill also contained new governance procedures for the PBGC, including a risk management officer for the agency's $73.3 billion portfolio, tighter conflict-of-interest controls, an advocacy office for participants and plan sponsors, and peer-review of plan modeling assumptions by other government agencies.
For corporate plans, the biggest positive change was interest rate stabilization. Since the 2006 passage of the Pension Protection Act, most plan sponsors have had to use discount rates based on a two-year average of corporate bond index rates to calculate their pension liabilities and figure out their funding obligations each year. The rates were further broken depending on the maturity of the plan and when payouts are due.
In the current low-rate environment, the first segment rate for valuing liabilities due in the next five years is a rock-bottom 1.98%, while the highest rate is 6.19%.
But under the new law, sponsors can take a 25-year historic average of corporate bond rates to determine a rate within a 10% range, or corridor, of the two-year rate.
Using the higher rates could reduce liabilities by 10% to 20%, estimates Donald Fuerst, senior pension fellow at the American Academy of Actuaries, Washington. The effective rate used now averages 5.3%, while the new discount rate will average 6.7%. “For some plans, it could make their entire underfunding problem disappear — for a while,” Mr. Fuerst said in an interview.