Pension plan sponsors are looking for a quick turnaround from the U.S. Department of the Treasury regarding the publishing of 25-year average interest rates to help them manage their immediate pension funding obligations resulting from provisions included in the Moving Ahead for Progress in the 21st Century Act.
Bloomberg BNA Pension & Benefits Daily interviewed John Ehrhardt concerning several features of the issue. The following are some excerpts from the article.
On historically low interest rates:
Because interest rates used to discount pension funding liabilities are at historic lows, many employers that sponsor pension plans are facing “a big bulge” in mandatory contributions to those plans in 2012, 2013, and 2014, Ehrhardt said. The higher discount rates enacted into law July 6 will have the effect of reducing employers’ minimum required contributions for those three years and pushing the “bulge” further out, he said.
For that reason, Milliman is advising clients that have cash on hand to make use of the higher discount rates to eliminate the bulge, Ehrhardt said. Sponsors that can afford to should make more than the required minimum contributions for the next few years, which would have the effect of stabilizing their annual pension funding obligations for a longer period, he said.
On cash flow:
Some companies might reason that, if they defer making more than the minimum required contributions for three or four years, possibly higher interest rates and higher equity returns will eliminate any significant pension underfunding, Ehrhardt said. However, with pension insurance premiums for underfunded plans about to increase, employers have an incentive “to fund more, not less,” he said.
The same law that provided the pension funding relief increased variable-rate premiums that the Pension Benefit Guaranty Corporation can collect from underfunded pension plans (126 PBD, 7/2/12; 39 BPR 1265, 7/3/12).
Read the results of Milliman’s latest Pension Funding Index here.