Minimum funding requirements by plan sponsors could change based on extensions in pension stabilization provisions.
That's the determination of a study by the Society of Actuaries that examines the effects of pension stabilization provisions on funding of the U.S. single-employer defined benefit system.
The report, "Stretching the Corridor: The Effects of Extended Rate Stabilization on Defined Benefit Plan Funding Requirements," looks at how much flexibility is increased in plan sponsors' minimum funding requirements as an outgrowth of an extension to the provisions.
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The provisions, according to the report, "modify interest rates used in the calculation of several statutory requirements for private sector single-employer defined benefit plans, including the calculation of minimum funding requirements. Where they apply, the provisions limit interest rates to within a specified range of 25-year historical average interest rates, creating a 'corridor' of potential interest rates centered on the historical average rates."
The original provisions were put in place under the Moving Ahead for Progress in the 21st Century Act (MAP-21). The report said, "Under MAP-21, the corridor expands from a 10 percent limit in 2012 – the '10 percent corridor' – to a 30 percent limit in 2016. Widening the corridor from 10 to 30 percent reduces the effectiveness of the provisions by reducing the likelihood that they will apply and reducing the interest rate adjustment when they do apply."
The extension studied by the report, put in place by an amendment under the Highway and Transportation Funding Act of 2014, extended for five years the "10 percent corridor."
The report found that the extension would add two to three years to the time before interest rates return to pre-MAP-21 levels. It would also defer funding of the system by about two years, thus giving plan sponsors additional flexibility in using cash. PBGC premium revenue would be increased by up to $10 billion, depending on the degree to which sponsors take advantage of contribution deferrals. In addition, sponsors would have a greater ability, beyond current limits, to derisk their DB plans.
However, "(p)erhaps most importantly, our analysis shows that extending the 10 percent stabilization corridor indefinitely — directly or indirectly — would have major implications for defined benefit funding policy because it would fundamentally change the targeting of funding levels," the report said.
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