The transportation funding bill expands the period used for determining interest rates for calculating pension liabilities to 25 years (see “Pension Funding Measure Addresses Low Interest Rates”). For 2012 the interest rates must be within 10% of the average of benchmark bond rates for the 25-year-preceding period, according to news reports. The provision helps plan sponsors because interest rates were much higher before the 2008 financial crisis, and the use of higher interest rates lowers pension liability calculations.
Retirement industry groups and providers have urged the legislature to pass the measure (see “Council Says Quit Stalling on Pension Funding Stabilization”). Researchers for the Society of Actuaries (SOA) say the pension funding stabilization provisions in the bill would effectively prescribe a pattern of valuation interest rates for the next several years, with a significant increase in 2012 rates followed by declines in subsequent years.However, they add that the predictability of contribution requirements would show some improvement in the short term but little improvement in the long term, because the funding stabilization provisions do not address non-interest-rate sources of volatility and are less likely to affect valuation rates in the future (see “Pension Funding Stabilization Not a Long-Term Cure”).
The measure includes other pension related provisions that the American Benefits Council (ABC) called a “mixed bag” for pension plan sponsors.
ABC President James A. Klein said: “As much as we appreciate the inclusion of pension funding stabilization, we strongly disagree with the decision to impose an additional $9 billion in pension plan premium hikes. The increase in insurance premiums paid to the Pension Benefit Guaranty Corporation (PBGC) effectively acts as a tax increase on companies that sponsor these plans for their employees.
“Unfortunately, large PBGC premium increases could negate the positive effect of the funding stabilization for several companies. Some have argued that raising premiums was the quid pro quo for enacting funding stabilization. But that is a false trade-off. Had Congress enacted even broader stabilization the federal revenue gain would have been higher, obviating the need to raise premiums. We are pleased, however, that the bill also institutes long-overdue improvements to the agency’s governance structure — particularly in light of the agency’s recent Inspector General Management Advisory report, which called into question the integrity of reported actuarial estimates.”
Klein commended lawmakers for including a provision extending the ability of employers to transfer excess pension assets to fund retiree health benefits and expanding the provision to allow transfers for retiree life insurance. “These transfers facilitate the continuation of retiree health insurance for countless retirees. Expanding this provision to allow transfers to pay the costs of retiree life insurance will also help foster personal financial security for seniors,” Klein said.