Many defined benefit plan sponsors are eager to take advantage of new interest rates used to calculate pension plan liabilities that could reduce their funding obligations by as much as 20%, a new survey conducted by T. Rowe Price finds.
Seventy-nine percent of respondents reported having contributions to make, and 68% of that group said the new rates will allow them to contribute less than the previously required minimum. Among total respondents, 65% said they do not plan to change their derisking programs.
“The net takeaway is that while plan funding levels may not grow as quickly as they may have prior to (a new federal law going into effect), it's obvious that most sponsors still have the resolve to reduce pension-related volatility,” the study's executive summary notes.
The new rates were included in a highway reauthorization bill, MAP-21, signed on July 6 by President Barack Obama. On Aug. 16, the Treasury Department issued the specific rates dictated by the law. The higher rates can have an immediate impact by lowering the liability and cash contribution sponsors need to make to defined benefit plans.
The three new segment rates of 6.15%, 7.61% and 8.35% mean that the previous average effective rate of 5.3% will now average 7.37%, depending on which time period a plan sponsor uses. Companies can use the new rates for their current fiscal year calculations, but will be required to do so for plan years beginning by Jan. 1, 2013.
T. Rowe Price surveyed 330 corporate DB plan sponsors with assets greater than $500 million. The survey was conducted July 18.
Roughly 10% of survey respondents had assets above $10 billion, while 61.5% were in the $5 billion to $10 billion range. Roughly half, 53.8%, of respondents reported their funded status as being between 80% and 90%.