Help for unfunded pension liabilities in MAP – 21 highway bill
Pension plans across the U.S. have been weathering a "perfect storm." Many pension plans that were well funded or fully funded as recently as 2008 are now severely underfunded. The unfunded liability is reflected on the employer's financial statement and can spell disaster for a business enterprise. Many factors including poor investment experience, historically low interest rates and, most of all, the unintended consequences of the 1996 Pension Protection Act have created financial havoc on most pension plans. If an employer wishes to terminate a pension plan to get out of the mess, the news only gets worse. Insurance annuity pricing for plan termination is at an all-time high.
The biggest culprit may be the Pension Reform Act of 1996. It wasn't supposed to be like this. The law had the noble purpose of requiring pension managers to use "market" interest rates to calculate pension plan liabilities. Today's interest rate environment could not have been imagined in 1996. The Federal Reserve Board's low interest rate policies and its practice of purchasing the bulk of U.S. Treasury instruments is unprecedented. But the resulting rates must be used by actuaries under the Pension Reform Act. Contrary to its intended purpose, the 1996 law has resulted in an Alice in Wonderland experience.
Interest rate assumptions are used by pension plan actuaries to estimate future and current pension liabilities. Future pension liabilities are calculated by a combination of factors, including life expectancies, average salaries and age of the work force. The pension actuary converts this into a current liability by using the so-called market interest rate to discount the future liability to a present value. The lower the discount rate, the larger the current liability. Pension funding obligations have mushroomed as a result.
The new 2012 law addresses this problem by broadening the definition of market interest rates. Current rates can be adjusted by comparison to historical rates over the past 25 years. This change in rate calculation will allow plans to use higher rates, which will result in lower pension plan liabilities and bring much needed relief.
Another Winner
The Pension Benefit Guaranty Corporation is also a big winner in the new law. Premiums due to the PBGC are increased from $35 per participant to $42 in 2013 then $49 in 2014 for single employer plans. Inflation adjustments apply thereafter. Similar increases apply to multi-employer plans and under-funded plan penalties.
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