Flying in under the radar of last week's more well-publicized announcements in Washington, the adoption of the federal highways and student loan stabilization legislation will still have some very major impacts – especially for major plan sponsors.
The pension discount rate stabilization included as part of the bill, which could provide material reductions in short-term contribution requirements to the tune of $40 billion to $50 billion for the largest plan sponsors in 2012, does still come at a cost, according to consulting firm Mercer.
While plan sponsors have been cut a massive break, the firm suggests they do some serious thinking to make sure that they keep their pension funds well funded.
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And premiums owed to the federal Pension Benefit Guarantee Corporation will also rise as part of the legislation, particularly for underfunded plans.
"Pension plan sponsors must fully evaluate their alternatives under the new legislation, and decide which options fit with their strategic financial and risk-managment goals," said Jacques Goulet, U.S. leader of Mercer's Retirement, Risk and Finance business.
"Lower near-term contribution requirements will be welcomed by many plan sponsors who faced significant increases in cash contributions as they struggle to recover from the recent financial crisis, especially for sponsors with liquidity issues."
Goulet said this short-term benefit may be offset by a major jump in PBGC premiums, especially those underfunded plans with variable rate premiums, who may see their required contributions double by 2015.
PBGC flat-rate premiums will jump from $35 to $42 per participant in 2013 and to $49 in 2014, at which point they will be indexed for inflation.
The bill itself, which allows major plan sponsors to hold off on their contributions, might generate almost $100 billion in savings through 2014, according to Mercer's estimates.
But companies should not use that as an excuse to continue to fund their pensions at marginal rates, as the underfunding crisis will not simply disappear, said Bruce Cadenhead, Mercer's chief actuary for U.S. Retirement, Risk and Finance.
"In particular, sponsors for whome cash volatility is a high priority may decide to adapt their Liability Driven Investment policies in the short term to maximize the volatility reduction resulting from the new law," Cadenhead said. "Many may also cash out terminated vested participants to avoid the increase in PBGC premiums and lower their administrative costs."
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