Based on analysis of Internal Revenue Service (IRS) valuation methodologies and Russell’s own capital market planning assumptions, Russell finds that pension funded status should fall 10% on average by next year. Furthermore, many plan sponsors will then face the prospect of acquiring the “at risk” designation outlined in the Pension Protection Act (PPA) and may need to make significant pension plan contributions and/or impose benefit restrictions, according to a press release.
The new research assumes that most defined benefit plans will elect to use smoothed asset valuation as of January 1, 2010, and a 24-month segmented yield curve for liabilities valuation, in order to minimize PPA contribution requirements for 2010. These choices will have the effect of deferring recognition of the impact of falling interest rates and asset values.
“Pension plans might be able to avert a fall in funded status by switching to a different combination of valuation methods next year, but given that IRS approval is required, the likelihood that pension funds will have that option appears low,” said James Gannon, manager, consulting and investment strategy, Russell Investments, in the announcement. “For those plan sponsors seeking to minimize PPA pension contribution requirements for 2010, smoothing does make sense. As a result, the pain of higher liabilities and lower asset values will only be deferred.”A copy of the research can be requested from here.