OUR THOUGHTS ON:

President Signs Law Providing Pension Funding Relief

ERISA

By Timothy Hammer

President Obama signed a U.S. transportation bill into law on Friday, July 6, 2012 that among other things provides relief to the funding of pension plan obligations. The new law will allow companies to contribute billions of dollars less to their pension funds than was previously required. When interest rates are low, pension plan liabilities are estimated to be higher, and employers are required to contribute more money to meet their minimum funding obligations. Under the new law, employers can put less money into their pension plans by using calculations that allow them to value liabilities using higher interest rates than the prevailing low rates. Many companies with large pension obligations were fighting to get this law approved because they believed they were facing a hurdle for investment in growth opportunities and other priorities with-in their organizations due to the cash drain for funding under the previous law. Simply stated, the new law allows companies to estimate future earnings based upon the average of the last 25 years interest rates compared to the old law that required the estimated earnings to be based upon the most recent two years, a time where historically lower interest rates have prevailed. The effective date of the new law is generally for plan years beginning after December 31, 2011.

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