2012 Pension Contributions Expected to Rise 30% to 40%

Reductions sought in Pension Protection Act's funding targets

By Stephen Miller, CEBS Mar 12, 2012

The aggregate funded ratio (assets over liabilities) for defined benefit pension plans sponsored by S&P 1500 companies was 79 percent on Feb. 29, 2012, up from 75 percent on Dec. 31, 2011, according to HR consultancy Mercer.

“U.S. pension plan funded status has gotten off to a good start in 2012,” said Jonathan Barry, a partner in Mercer’s retirement risk and finance business. “But before sponsors declare the pension crisis to be over, it is important to realize we have had numerous examples over the past few years of funded status improvements quickly wiped out by market movements. This highlights the importance of plan sponsors having a plan in place to know when to take risk off the table and having the governance structure in place to be able to react quickly when the opportunity arises.”

Avoiding PPA-Triggered Penalties

Despite the rise in the stock market at the start of 2012, most plan sponsors will be required to contribute significantly higher amounts to their plans during the year in comparison to 2011 because funding requirements for most plan sponsors are based on average interest rates and smoothed asset returns.

“Plan sponsors in the S&P 1500 disclosed estimated 2011 contributions totaling $50 billion in their 10-Ks issued [that] year,” said Craig Rosenthal, a partner in Mercer’s retirement risk and finance business. However, “We saw significant discretionary contributions from many plan sponsors in the latter half of 2011, which in large part were made to avoid benefit restrictions under the Pension Protection Act (PPA). We expect the contribution amounts that will be disclosed in the upcoming 10-K filings to be made in 2012 will be significantly higher than the $50 billion figure from [2011]. We currently anticipate that required contributions for 2012 will increase 30 percent to 40 percent in aggregate, and we expect many plan sponsors may choose to make additional contributions during 2012 to avoid the imposition of PPA’s benefit restriction requirements.”

Former PBGC Directors Calls for Lower Funding Targets

"Congress should reduce funding targets—at least for healthy corporations—to a range of 80 percent to 85 percent, not the 100 percent required today," according to Charles E.F. Millard, managing director for pension relations at Citigroup Inc. and director of the Pension Benefit Guaranty Corp. (PBGC) from 2007 to 2009. Millard, in a March 7, 2012, op-ed for Bloomberg News, noted that meeting required funding targets could impair corporate cash flows dangerously and that "the real threat to the Pension Benefit Guaranty Corp. and to the recipients isn’t an underfunded pension plan—it is an underfunded pension plan in a company that goes bankrupt."

Along similar lines, a policy statement from the American Benefits Council, an employer group, noted that the Pension Protection Act requires funding shortfalls to be amortized over seven years, which "created unmanageable obligations following the 2008 downturn and is threatening to create even more unmanageable obligations for 2012 and subsequent years." Under the council's proposal, the amount necessary to bring a plan to 80 percent funded status would be amortized over the current law's seven-year period, and remaining shortfalls would be amortized over 15 years.

An Opposing View

A contrary view to Millard's was expressed in a responding op-ed by financial writer Roger Lowenstein, who wrote, "This is no reason…to ease up on requiring that ongoing plans be actuarially sound. … [T]he PBGC already faces a $26 billion deficit, and the agency estimates it will incur as much as $250 billion in possible losses from underfunded sponsors in the future. Permitting more underfunding hardly seems prudent."​

Stephen Miller
, CEBS, is an online editor/manager for SHRM.

Related Articles:

Pension Funding Volatility Remains Top Priority, SHRM Online Benefits Discipline, February 2012

Five Key Pension Risk Management Tips, SHRM Online Benefits Discipline, January 2012

CFO Survey: Continued Volatility Will Alter Pension Risk Management, SHRM Online Benefits Discipline, December 2011

Risk-Management Q&As for HR Professionals Who Oversee Pension Plans, SHRM Online Benefits Discipline, November 2011

Quick Links:

SHRM Online Benefits Discipline

SHRM Online ​Retirement Plans Resource Page

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