Pension Funding Relief Legislation Becomes Law
July 9, 2012
On Friday, the Moving Ahead for Progress in the 21st Century Act, or “MAP-21” Act, became law. The Act increases the interest rates that are used for valuing single-employer, non-governmental pension liabilities. For many pension plan sponsors, this will significantly reduce the amount of required annual contributions in the short term. And in some cases, plan sponsors that are currently restricted from paying lump sum distributions to participants will be able to remove those restrictions.
Following the Pension Protection Act of 2006, pension plan sponsors were required to use a rolling 2-year average of corporate bond rates to value their plan’s liabilities for funding purposes. Because of historically low current interest rates, this method has resulted in a recent sharp increase in pension liabilities and a correspondingly sharp increase in minimum annual funding obligations. The MAP-21 Act allows pension plan sponsors to instead use a 25-year average of corporate bond rates instead of the 2-year average. Actuaries are estimating that many plans will see between a 10% to 20% reduction in liabilities as a result of this change.
The Act may further impact those pension plans that are currently restricted from paying lump sums and other types of distributions (because of a funded status below 60% or 80%). The Act allows a plan sponsor to remove these benefit restrictions for a plan if the plan’s funded status increases to 60% or 80%, as the case may be, under the new interest rate assumptions.
On the other hand, the Act increases PBGC insurance premiums, especially for underfunded plans. Importantly, this increase in PBGC premiums also applies to multiemployer plans, even though the interest rate relief does not. Employers that sponsor single-employer plans should still realize significant cost savings, however, because the increase in PBGC premiums should be far lower than the immediate reduction in annual contributions.