DB Funding Relief Great but Temporary

Defined benefit sponsors have the potential to receive billions of dollars in temporary pension funding relief as a result of legislation signed into law last month, according to a new Towers Watson analysis.
 However, while the law may significantly ease financial pressures for some sponsors for at least two years, employers face potentially larger funding obligations after 2011, Towers Watson said, in a news release.   

The Towers Watson analysis projected funded status and minimum required contributions for single-employer DB plans under three scenarios for the five plan years from 2009 through 2013: the funding provisions before the pension relief measure and the two funding options under the new law. It did not consider the impact of the law’s 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.  

The analysis found that, under the pre-Act provisions, the minimum required contributions in aggregate would be $78.4 billion for plan year 2010, and would escalate to $131 billion for 2011 and approximately $159 billion for both 2012 and 2013, according to the news release.   Under the new law, however, required contributions would be reduced between $19 billion and $63 billion, depending on which of the two provisions and which plan years employers choose.  

The announcement said the 15-year amortization for 2010 and 2011 funding shortfalls offers employers the maximum aggregate funding relief for employers over the 2009 through 2013 projection period; the seven-plus-two-year option for 2009 and 2010 funding shortfalls provides the least amount of relief.    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.  

Under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, employers with underfunded DB plans may elect to amortize funding shortfalls for any two plan 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.  

“The federal government has given employers the much-needed and welcome funding relief they were seeking,” said Mark Warshawsky, director of retirement research at Towers Watson, in the news release. “Despite some improvement in the overall health of pension plans since the depths of the financial crisis, employers had been bracing for sharp increases in their DB funding obligations. Now, with the new law, employers can breathe a collective, albeit temporary, sigh of relief.”   

More information about the analysis is at http://www.towerswatson.com/research/2389.