Contact: Mercer Feedback
, New York City
- The bill provides material reductions in near-term contribution requirements - $40 to $50 billion for S&P 1500 plan sponsors for 2012
- Impact of discount rate stabilization will likely be most significant for the next few years – sponsors may need to adapt their investment policies
- Notwithstanding the stabilization provisions, plan sponsors have a strong incentive to keep their pension plans well funded
- PBGC premiums will rise substantially for all plans and particularly underfunded plans
Congress on Friday passed, and the President will soon sign, a highway and student loan bill reducing pension plan sponsors’ near-term required contributions while also raising premiums to the PBGC (Pension Benefit Guaranty Corporation).
“Pension plan sponsors must fully evaluate their alternatives under the new legislation, and decide which options best fit with their strategic financial and risk management goals” said Jacques Goulet, US leader of Mercer’s Retirement, Risk & Finance business. “Lower near-term contribution requirements will be welcomed by many plan sponsors who faced significant increases in cash contributions as they struggle to recover from the recent financial crisis, especially for sponsors with liquidity issues. On the other hand, all plan sponsors face significantly higher PBGC premiums – in particular variable rate premiums for underfunded plans will more than double by 2015. Thus plan sponsors have a strong incentive to keep their plans well funded, which means many will choose to contribute more than the minimum required under the bill.”
Mr. Goulet noted that plans that would otherwise fall below key funding thresholds will now have more time to improve the funding levels and avoid restrictions on their ability to pay some accelerated benefit forms, such as lump sums.
The bill provides real and material relief for corporate sponsors facing significant increases in cash contributions over the next few years. That relief could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014 according to Mercer estimates. On the other hand, the bill doesn’t change plan sponsors’ underlying pension obligations. It merely gives them more time to address their plans’ current funding shortfalls, many of which are the result of today’s low interest rate environment.
PBGC premiums rise substantially for all plans and underfunded plans, in particular, will incur higher variable-rate premiums. This will mean higher costs for all plan sponsors, especially for those with underfunded plans, Mercer notes. PBGC flat-rate premiums will increase from $35 to $42 per participant in 2013 and $49 in 2014, and then will be indexed for inflation. In addition, the PBGC variable-rate premium that is assessed on each $1,000 of unfunded vested benefits will more than double by 2015.
The legislation establishes discount rate stabilization that both reduce short term contributions and variability in those contributions. “This has the effect of removing a factor of uncertainty in the calculation of pension liabilities but will mean that sponsors should evaluate the effect of the changes on their pension investment policies” said Bruce Cadenhead, Mercer’s chief actuary for the US Retirement, Risk and Finance business. “In particular, sponsors for whom cash volatility management is a high priority may decide to adapt their Liability Driven Investment policies in the short term to maximize the volatility reduction resulting from the new law. Many may also cash out terminated vested participants to avoid the increase in PBGC premiums and lower administrative costs.”
Mercer is a global leader in human resource consulting and related services. The firm works with clients to solve their most complex human capital issues by designing and helping manage health, retirement and other benefits. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting.