Description: A frustrating aspect of pension funding rules for U.S. plan sponsors is that contribution requirements are adversely correlated with business cycles. For example, not only did plan sponsors get hit with large contribution requirements in the perfect storm of the early 2000s, but many sponsors were prohibited from contributing in the late 1990s boom due to full funding limitations. This paper proposes that plan sponsors be allowed to contribute the normal cost as a deductible contribution each year. In hindsight, this would have allowed plan sponsors to pay for benefits as they accrued in the late 1990s and ultimately mitigated some of the crash of the early 2000s. The authors aim to demonstrate that a contribution policy allowing contributions to be at least equal to the normal cost will result in less volatility of contributions and improve the funded status over time.

Description: This paper explores the range of contribution policies allowable under various sets of rules, and then proposes that plan sponsors be allowed to contribute the normal cost as a deductible contribution each year. From The Future of Pension Plan Funding and Disclosure Monograph, M-RS05-1.