Mercer estimates that among the private-sector plans it studied, more than two-thirds will see required contributions jump from last year by at least 50%, and at least one quarter will likely see contributions more than double.
A news release explained that historically low interest rates driven in large part by U.S. economic policy, together with prior equity declines, will hit plan sponsors with a vengeance in 2011, but the full effects of this one-two punch won’t be fully felt until 2012 and beyond, Mercer says. These huge and continuing cash calls, the slow economic recovery, and big potential increases in Pension Benefit Guaranty Corporation (PBGC) premiums under consideration in Congress could place many plan sponsors in a difficult position.
These are some of the conclusions from a Mercer analysis of 849 private-sector single-employer plans subject to the Pension Protection Act (PPA), with more than $191 billion in combined assets as of January 1, 2010, and covering more than four million participants.
Without changes to the pension funding rules, Mercer expects the funded status for many plans in 2011 will likely decline significantly as a result of prior periods of equity declines and falling interest rates, with the following implications:
- Funded ratios to fall. The aggregate 2011 funding ratio for surveyed calendar-year plans is expected to drop to 86% from 101% in 2010. Roughly half of all surveyed plans would have needed 2010 contributions in excess of the minimum required amount to prevent their 2011 funded ratios from falling below 80% – a critical PPA threshold for measuring funded status that triggers benefit restrictions and may trigger the law’s more onerous “at-risk” funding requirements.
- Required contributions soar. For the surveyed plans, 2011 required contributions are expected to be much higher than required 2010 contributions. Nearly two-thirds of the plans are projected to see an increase of at least 50%, and more than one-quarter are expected to have their required contributions more than double.
- Credit balances wither. Total credit balances for the surveyed plans are expected to drop by roughly half in 2011 from 2010. More than 42% of the surveyed calendar-year plans had credit balances less than half of their required 2010 contributions, and more than one-quarter of surveyed plans had no credit balance to offset their contributions. For 2011, 63% of the surveyed calendar-year plans are estimated to have credit balances less than half of their required 2011 contributions, and nearly half will probably have none.
- Cash contributions skyrocket – up eightfold in just two years. Assuming sponsors use available, credit balances to satisfy their minimum contribution requirement, the remaining required cash contribution is projected to be nearly three times larger for 2011 than for 2010, after more than doubling from 2009 to 2010. The combined increase in aggregate required cash contributions from 2009 to 2011 is projected to be 690%, meaning that sponsors of surveyed plans will need to contribute nearly eight times more to their plans for 2011 than for 2009, as illustrated in the accompanying chart.
- Additional contribution increases expected in 2012. Further sizable increases in minimum required contributions and cash contributions are expected for 2012 as equity markets remain volatile, interest rates continue to decline and credit balances are exhausted. The combined effect of these events will place additional pressure on pension plan funding levels and trigger higher required contributions for coming years due to the short time for funding unexpected changes in investment returns and interest rates under PPA.
Mercer’s full report, “Estimated 2010/2011 Required Contributions and Credit Balances,” can be accessed at http://select.mercer.com/article/20117116.