The renewed decline of funded status for defined benefit retirement plans this year has not led the largest U.S. DB plan sponsors to contribute from their coffers to compensate, a phenomenon that one investment advisory firm attributes to temporary interest rate stabilization.
Until this year, corporate contributions to DB plans typically correlated with the plans’ funded status, said Senior Asset Allocation Strategist Justin Owens of Russell Investments in a March client bulletin. For example, a sudden increase in corporate contributions to pensions was recorded in 2009 when their funded status was low, and contributions dropped in 2014 when average funded status the year before was the best it had been in years.
Russell monitors a group of 19 massive employer pensions it calls the “$20 Billion Club,” which comprises 40 percent of the total DB liability in the United States and holds $750 billion in pension assets.
The difference in this trend seen so far in 2015 — when the biggest companies’ pension contributions are expected by Russell Investments to be down by 30 percent — is funding relief under the Highway and Transportation Funding Act of 2014, which extends for five more years favorable interest-rate stabilization for defined benefit pension plans.
In fact, the Russell report said, 15 of the 19 largest pension sponsors that the firm tracks have disclosed that they won’t be required to contribute any significant amount to their U.S. plans in 2015, although 18 have underfunded global pension liabilities. Some years, large companies disclose contributions of more than $1 billion to shore up their DB plans’ funding. United Technologies, Lockheed Martin and General Motors all have announced they expect to see no need to make a U.S. pension contribution for years to come, despite having funded status of 87 percent or less.
Underfunded status is traditionally regarded as a pension asset-to-liability ratio below 80 percent. Plans with assets below that level may have trouble meeting obligations to retirees and other beneficiaries or may face benefit restrictions established by the Pension Protection Act of 2006.HATFA carried forward pension funding “smoothing” started by the Moving Ahead for Progress in the 21st Century Act, known as MAP-21, which was enacted in 2012. That change to pension funding was a revenue-raising provision for the federal government, and also made it easier for plans to meet minimum funding requirements in an atmosphere of historically low interest rates.
While HATFA is believed to be temporary relief, other factors still may influence these big pension sponsors to boost contributions in the future. IRS is expected to update the mortality tables it uses for funding calculations to reflect the increasing longevity of retirees today, and the ongoing rise in U.S. Pension Benefit Guaranty Corp. variable rate premiums will “motivate sponsors to improve funded status by making more discretionary contributions,” Owens said in the bulletin.
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