Pension Funding Stabilization Not Long-Term Cure

June 19, 2012 ( – Pension funding stabilization provisions of a bill currently going through Congress would provide pension plan sponsors some short-term relief, but would not address long-term problems.

Researchers for the Society of Actuaries (SOA) say the pension funding stabilization provisions in the Moving Ahead for Progress in the 21st Century Act (MAP-21) 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.   

Initially, aggregate contribution requirements would be significantly less than under current law (approximately 43% in 2012), but would then be expected to increase each year until ultimately exceeding the amounts that would have been required under current law.   

The report, “Proposed Pension Funding Stabilization: How Does it Affect the Single-Employer Defined Benefit System?” indicates 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.    

The prescribed rates would mask market-related changes in funded status for several years. For example, funded statuses in 2013 and 2014 would likely not be materially affected by increases or decreases in interest rates from today’s levels.

The solvency of plans would decline in the short term due to lower contributions, and would eventually return to the levels expected under current law as contributions increase.  

Joseph Silvestri, FSA, MAAA, retirement research actuary with the SOA and lead researcher of the report recommends plan sponsors contemplate the effects of future obligation increases to avoid undesired fluctuations in their contribution requirements and the risks associated with declining funded ratios.   

“The analysis ultimately suggests that plan sponsors hoping to stabilize cash flows to their plans should account for the pattern set by the interest rate limit when planning their contributions, taking into account the decline in valuation interest rates that will certainly follow the 2012 increase,” he said.   

The report can be accessed here.