CBO Lowers Projected DB Contributions

August 16, 2005 (PLANSPONSOR.com) - Congressional economists say that larger than anticipated corporate pension contributions has led to a lowering of estimates on the level of expected defined benefit plan contributions.

The Budget and Economic Outlook: An Update, August 2005 from the Congressional Budget Office (CBO) said the level of contributions CBO now is projecting for 2005 is about $15 billion lower than its previous forecast at the beginning of the year.

However, CBO economists also said that because the projected maximum applicable interest rate has been reduced since CBO’s previous estimates, “projected contributions are now higher by about $35 billion for 2006, $70 billion for 2007, and $50 billion for 2008.” According to the report, the newer estimates reflect both lower yields on 10-year Treasury notes and a smaller assumed spread between the yields on 10-year and 30-year Treasury securities.

“By 2015, estimated contributions in CBO’s current forecast are about $100 billion higher per year than they were in its January forecast. Most of that difference is attributable to improvements in CBO’s methods for estimating the probability of a plan’s default,” CBO said.

The CBO economists also admitted that their projects are based on delayed data. “CBO’s estimates reflect the best available information about the current funding status of defined benefit plans, but complete and accurate data on past contributions and current funding become available only after a lag of several years,” the economists wrote.

Not only that but plan sponsors’ contributions will be significantly impacted by the future direction of the markets, the agency pointed out. “Several years of rising stock prices could increase the value of plans’ assets by enough to eliminate the underfunding in many plans,” the CBO said. “Conversely, falling stock prices over the next several years could drive some of the most distressed plans into default, shifting the burden of payments from the plans’ sponsors to the federal Pension Benefit Guaranty Corporation. A weak stock market would probably also substantially increase the contributions required for defined benefit plans that remained in existence.”

The CBO report is  here .