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Pensions May Face Unexpected Funding Demands

By Stephen Miller  2/22/2010
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U.S. employers with defined benefit pension plans are expected to face unexpected and significant challenges in 2010, when required contributions could more than double—and funding levels could drop enough to trigger benefit payment restrictions put in place by the Pension Protection Act (PPA).

“The temporary pension relief from Congress and some market recovery in 2009 have led many plan sponsors to expect a better funded status and lower required contributions than they will actually experience in 2010,” says Barry Young, consulting actuary at The Principal Financial Group, a provider of investment and retirement plan services. “The reality is, because interest rates have dropped, most plans will need higher contributions in 2010 and 2011. Retirement plan assets have not recovered enough to cover future liabilities. There are no guarantees of congressional relief in 2010," Young noted, and he advised plan sponsors to contact their actuaries so they understand the funding requirements they could be facing.

Challenges Ahead

Potential issues that defined benefit plans are likely to confront in 2010 include:

Decreases in plan funded status for 2010 and 2011.

Increased required contributions for both years.

Possible automatic benefit restrictions as soon as the end of first quarter 2010.

“Credit is still very tight, and an unexpected cash infusion into the plan could force employers to make difficult choices in order to fund their defined benefit plans,” says Young. “But if they find out now what they are facing, it will at least help them plan their cash flows early enough to possibly help prevent restrictions on their plans.”

Downbeat Start to 2010

After a significant recovery throughout 2009, companies in the S&P 1500 again watched as a drop in equity markets reduced the funded status of their pension plans at the start of 2010. Mercer, an HR consultancy, estimates that among the 874 private-sector plans it studied, aggregate required cash contributions for 2010 will be 400 percent higher than for 2009.

“Many sponsors are monitoring the financial markets and the way that markets have affected the funded status of their pension plan much more frequently,” says Adrian Hartshorn, a partner in Mercer’s financial strategy group. “This allows them to avoid surprises as well as to implement dynamic asset allocation decisions to avoid or cushion the impact of market volatility.”

“A significant portion of the increase in 2010 minimum required contributions is related to amortization of the funding shortfalls,” adds Craig Rosenthal, a partner in Mercer’s retirement, risk and finance business. “Even factoring in a proposed House bill that would give sponsors more time to amortize funding shortfalls, aggregate minimum required cash contribution amounts are still expected to increase dramatically for 2010 under either of two alternative amortization periods proposed. Plan sponsors will be facing sharply higher minimum required contributions for 2010.”

Funding Relief Sought, Jobs Cited

Referencing Mercer's finding that cash contributions to pension plans will be 400 percent higher in 2010 than in 2009, and another finding that 68 percent of employers reported that unexpected cash outlays for pension plans would cause cuts outside the plan including hiring and workforce training, American Benefits Council President James A. Klein commented, "Do we really need any further evidence that pension funding is a jobs issue?"

Similarly, a statement by the ERISA Industry Committee (ERIC), an organization representing plan sponsors, called Sen. Majority Leader Harry Reid's decision not to include pension-funding relief in the Senate jobs bill "disappointing and short sighted." ERIC President Mark Ugoretz said, "This is an urgent issue for employers—many of whom are strapped for cash and must choose between funding their plans and hiring delays or even further cutting back on jobs. Failure to include relief will only further delay the economic recovery and put retirement security at risk."

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Market Volatility Leads to Broader View of Pension Risks, SHRM Online Benefits Discipline, March 2010

Treasury Secretary Backs Pension Funding Relief Bill, SHRM Online Benefits Discipline, February 2010

Defined Benefit Plans Outperformed 401(k) Plans During Bull and Bear Markets, SHRM Online Benefits Discipline, February 2010

Pension Funding Levels Rebounded in 2009; Still Below 2007 Levels, SHRM Online Benefits Discipline, January 2010

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