June 2012

Pension Funding Stabilization

By Martin McCaulay

Editor’s note: The Society’s Rapid Research Initiative recently released a report, analyzing the effects of the bill on the DB system as a whole, as well as individual plan sponsors. The report reviews potential changes to the pattern and volatility of contribution requirements, the transparency of plan funded status, and the solvency of the system. For a recent blog post on this topic which includes a link to this report, click here.

Senate Bill 1813, Moving Ahead for Progress in the 21st Century or MAP-21, authorizes appropriations for federal highway spending and includes pension stabilization provisions that would apply to sponsors of defined benefit plans. Section 40312 of the Bill would stabilize pension funding by putting a corridor on segment rates based on a 25-year average. The corridor would start at plus or minus 10 percent of the 25-year average and increase by 5 percent each year until reaching 30 percent. The pension funding stabilization would be expected to generate $9 billion in revenue for highway funding. The Bill would also amend IRC Section 420 to extend the period for allowing transfers of excess pension assets to retiree health accounts, and to allow the transfers to be made to retiree group term life insurance accounts as well.

If a segment rate for a month is less than or greater than the applicable minimum percentage of the average of the segment rates for a 25-year period ending with September 30 of the calendar year preceding the beginning of the plan year, then the segment rate for the month would be equal to the applicable minimum or maximum percentage of the average, whichever is closest. The applicable minimum and maximum percentage ranges are 90 percent to 110 percent for 2012; 85 percent to 115 percent for 2013; 80 percent to 120 percent for 2014; 75 percent to 125 percent for 2015; and 70 percent to 130 percent after 2015. The IRS would determine the average annually and provide rates for any years in which rates are not available.

The amendments would apply with respect to plan years beginning after Dec. 31, 2011. A plan sponsor could elect not to have the amendments apply to any plan year beginning on or before the enactment date for determining the adjusted funding target attainment percentage. Based on current interest rates, the corridor would increase the rates for funding requirements and decrease minimum contributions for 2012. Contribution requirements could decrease by 15 percent to 30 percent in the short term.

Senate Bill 1813 was introduced by Senator Barbara Boxer [D-CA] on Nov. 9, 2011; reported by the Senate Committee on Environment and Public Works on Nov. 11, 2011; and passed the Senate on March 14, 2012 by a 74-22 vote. The Bill has not passed the House of Representatives. Members of Congress appointed to the House-Senate Conference Committee began meeting on May 8, 2012 to reconcile differences between the House version and the Senate Bill.

Martin McCaulay, FSA, EA, MAAA, FCA, is an actuary at the U.S. Department of Energy in Washington, D.C. He can be reached at Martin.McCaulay@hq.doe.gov.