Public Companies Ask Congress for Pension Funding Relief
Low interest rates mean trouble for savers, especially institutional savers like pension plans. Federal Reserve Board efforts to maintain a low interest rate environment, which are expected to persist through 2014, present a problem for pension plan sponsors who need to fund future health and retirement benefits.
General Electric, Boeing, and Lockheed Martin are among several big public companies seeking pension relief from Congress, according to a March 6th article by the Wall Street Journal.
Plan sponsors rely on assumed rates of return to determine appropriate funding levels for future obligations. When the assumed rate of return increases, as it tends to do in a high growth economy, current funding requirements decrease. A lower rate of return, as seen in today’s economic outlook, requires a higher current funding level in order to meet future obligations. By one industry estimate, each 1 point reduction in the assumption rate means 10 percent more in current contributions.
Pension plans are now under pressure to make large cash outlays to shore up underfunded pension obligations. The stage was set in 2008 following the United Airlines pension default, when a new law was passed that required companies to closing funding gaps by 2015. The law also required that companies use market rates to determine funding levels. Now that the deadline is looming, the Fed’s low interest rate policy is making compliance difficult.
Companies are "not opening a plant or not launching a new product because they're sitting on the cash because it's going to look like they'll owe it to their pension plan," according to a Wall Street Journal quote by Lynn Dudley, senior vice president for policy of the American Benefits Council.
An effort is underway in Congress that would apply to private-sector defined benefit pension plans. Specifically, a rider was added to pending highway legislation (S. 1813) that would alter the “discount rate” that is used by plan sponsors to calculate required pension contributions. Modifications that would result in a higher rate, and lower payments, are favored by many underfunded plan sponsors. The transportation bill rider was passed in the Senate, 74-22, on March 14, 2012.
The U.S. government is backing the initiative as well, since it may result in increased short term tax revenues.
Whether current pension relief becomes law or not, the effort reveals the financial distress being felt by pension plan sponsors in today’s low interest rate environment.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778 or www.erisa-benefits.com.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.