The Pension Protection Act, which became law in August 2006, was the most sweeping rewrite of U.S. retirement law since the Employee Retirement Income Security Act of 1974.
The law sped up how quickly companies must amortize deficits to their defined benefit plans and required at-risk plans to make additional contributions.
Later, in December 2006, the adoption of Financial Accounting Statement 158 moved pension plan liabilities to the corporate balance sheet from financial statement notes.
That move transformed how U.S. corporations with defined benefit plans perceived the liabilities they held and accelerated the pace at which large-profile companies froze the accruals of their DB plans.
And while the PPA and FAS 158 were intended to deal with underfunding, whatever crisis the tech bubble of 2000 created was far overshadowed by the 2008 financial crisis. “Much of corporate America (witnessed) what the downside risk of pension and liabilities can look like,” said Joseph Nankof, founder and partner at Rocaton Investment Advisors LLC, Norwalk, Conn.
Liability-driven investing first emerged in Europe in 2005 after the International Accounting Standards Board, London, amended its Rule 19, effectively banning the practice of actuarial smoothing — deferring gains and losses from one year to the next — by European pension plans.
LDI strategies, which use a glidepath to slowly increase the allocation to long-duration fixed-income assets as the funding ratio of a pension plan improves, were embraced several years later by U.S. plans that faced yet another pension funding quandary following the -37% return for the S&P 500 index in 2008 that resulted in more corporations closing and freezing their traditional defined benefit plans.
Reducing the risk, however, still would not do away with the administrative cost of maintaining even a hibernating defined benefit plan.
The final hurdle for many companies to enable them to scuttle risk entirely was the final phase of the PPA, which took effect on Jan. 1, 2012.
That final phase brought in new corporate bond rates to replace 30-year Treasuries, the spread between which was generally 125 to 150 basis points, to determine the size of lump-sum payments.
