DB Sponsors Have Incentive to Keep Plans Well Funded

July 2, 2012 ( – New pension rules will reduce defined benefit (DB) plan sponsors’ near-term required contributions, but will also raise premiums to the PBGC (Pension Benefit Guaranty Corporation).

By Rebecca Moore | July 02, 2012
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The bill provides real and material relief for corporate sponsors facing significant increases in cash contributions over the next few years (see “Congress Passes Bill with Pension Funding Relief”). 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.   

The 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. Mercer notes the bill does not change plan sponsors’ underlying pension obligations; it 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. 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.