Aon: Pension Relief Impact Varies

July 23, 2010 ( – A recent report by Aon Consulting suggests that defined benefit plans will be impacted in different ways by recent pension relief legislation.

Aon notes, however, that it is easier to discuss this issue of impact by focusing on who is not affected by the new law. 

According to the report, the pension relief may not be significant if:

  • Your plan is overfunded, i.e., you have no current ERISA funding obligation other than (perhaps) normal cost.
  • You must comply with what we call “funding regime two” – i.e., to avoid certain penalties (e.g., a restriction on the ability to pay lump sums), you must get funding above 60% or 80%.

As for that “funding regime two”, Aon notes that the Pension Protection Act, in effect, contains two funding regimes; one applicable to all corporate DB plan sponsors that generally requires funding of shortfalls over 7 years, the other applies certain penalties – including benefit restrictions, at-risk rules, Pension Benefit Guaranty Corporation (PBGC) reporting, and a limitation on funding of executive compensation.  Those in that latter regime are also subjected to a limitation on funding executive compensation.

Now, as a general matter (and with some exceptions), the Aon report notes that a sponsor does not have to conform to funding regime two requirements as long as it is willing to put up with the restrictions that apply, e.g., if funding falls below 80%. “But if you do have to comply, the relief provided by the new law generally will not help; it’s really only funding regime one relief,” observes Aon.  “In this regard, given interest rate and asset performance to date, 2011 (based on end-of-year 2010 values) may be a tough year for some companies and test their resolve to stay above 80%.”


Items of Note

The Aon report also cautions of a “few items to note on legislative language”.  Specifically, the report notes that the bill that passed into law was identical to the bill passed by the Senate in March, but did not reflect some “clean up” added to the House bill passed in May. 

As a result, at least two items that were cleaned up in the House bill are now problematic, according to Aon.  First, relief on level income restrictions are retroactive. Therefore, companies that applied restrictions in these forms of payments prior to 2010 may need to revisit these calculations, according to the report.  As for the second item, Aon says that technically, the legislation can be read to double count relief offsets under the cash-flow rules for plans that elect multiple years of relief, meaning that, for instance, $2 million in excess compensation in 2011 may reduce the impact of funding relief by $4 million for some plans. “While legislators have indicated that this is not the intention of the law, Treasury officials are struggling to read this intention into the statutory language,” according to Aon.

You can read the full report at