Pension Plan Risk

A recent webinar highlighted current trends regarding companies de-risking their pension (defined benefit) plans and provided some interesting statics. 

On average in 2013, plans were 95% funded, meaning plan assets represented 95% of plan benefit obligations with 31% of all plans being overfunded (plan assets were greater than the plan’s benefit obligation), which is up from 74% funded and 4% of plans being overfunded in 2012.  With the gap between plan assets and the benefit obligations closing in on 100% because of healthy returns on plan investments and increasing discount rates, 2014 may present an opportunity for plan administrators to adjust the asset allocation of plan assets.  Specifically, as an investment portfolio comprises more fixed-income types of investments, it reduces its volatility to changing market rates that will continue to be unpredictable. 

While 2013 seemed to be a favorable year for pension plans, 2014 has the opportunity to deplete those good fortunes of returns and discount rates.  Mortality rates continue to change and actuaries are seeing that participants in plans are living two to three years longer, the effect of which could be an increased obligation of 2% to 8%. 

Additionally, the Pension Benefit Guarantee Corporation (PBGC) charges plans a flat-rate premium per participant and a variable rate premium for unfunded vested benefits, both of which have increased in 2014 as a result of the Moving Ahead for Progress in the 21st Century Act (MAP-21) and are set to increase in 2015 and 2016 with the Bipartisan Budget Act of 2013.

With the per-participant charge being unavoidable, there are incentives for plans to contribute more than the minimum required contribution to avoid an unnecessary variable rate premium charge.  Incentives include allowing the plan sponsor to claim additional tax deduction for contributions to the plan, and a financial statement incentive that reduces the projected liability shown on the balance sheet.  

Premium rate information is available on the PBGC website at https://www.pbgc.gov/prac/prem/premium-rates.html.  

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