Despite Funding Relief, DB Contributions May Stay Above Minimum

July 3, 2012 (PLANSPONSOR.com) - Contribution activity could remain above the minimum requirement despite a bill that gives defined benefit (DB) plan sponsors funding relief, a report contends.  

The transportation funding bill expands the period used for determining interest rates for calculating pension liabilities to 25 years (see “Pension Funding Measure Addresses Low Interest Rates”). For 2012, the interest rates must be within 10% of the average of benchmark bond rates for the 25-year-preceding period. The provision helps plan sponsors because interest rates were much higher before the 2008 financial crisis, and the use of higher interest rates lowers pension liability calculations.   

While the funding relief is expected to lower the mandatory contribution requirements over the next several years, many plan sponsors have historically contributed more than the minimum requirement in any given year, according to a report by Goldman Sachs Asset Management (GSAM). The firm expects that trend to continue.

Many plan sponsors have previously said they intend to make large contributions to their pension plans. Even if required contributions are lowered, some plan sponsors may still want to make large payments into their plans because of record levels of cash on corporate balance sheets and low interest rates available in credit markets.

Plan sponsors who have large cash balances or simply do not want to change their strategy are most likely to remain contributing more than the minimum, Michael Moran, pension strategist at GSAM, told PLANSPONSOR. 

Moran said if plan sponsors contribute less, they should keep in mind that the pension liability recognized on the balance sheet will not decline as much as it would if a higher contribution was made. “You still have the liability there,” he stated.

While this new legislation would help some corporate DB plan sponsors who are struggling to make extremely large required contributions, it is not a cure-all, Moran emphasized.

“Because of the way the legislation was written, the effectiveness of that relief diminishes over time,” he added.

On June 29, Congress gave its final approval for the bill’s pension changes (see “Congress Passes Bill With Pension Funding Relief”).