A bill meant to raise revenue for highway funding promises to ease pension funding requirements for companies by toying with interest rates used to calculate minimum contributions.
The House and Senate have both passed the Highway and Transportation Funding Act with amendments to pension smoothing provisions that are expected to result in lower required pension contributions for companies that still carry defined benefit pension plans. The pension funding relief is included in the transportation bill as a revenue raiser. The thinking goes that if companies reduce their pension contributions, ultimately they’ll pay more in taxes because they’ll have more taxable income, says Anne Waidmann, director of human resource services at PwC.
The bill, which President Obama is expected to sign, would delay a scheduled phase-down of a complex formula for determining interest rates companies would use to compute their contribution requirements. “When you use low interest rates to determine pension liabilities, you have to put more money into the plan,” says Waidmann, because the principal will earn less over time, so contributions need to be higher to meet the expected future liability. “If you use higher interest rates, you assume the assets are going to earn more, so you need to contribute less.”
The Pension Protection Act of 2006 mapped out funding requirements based on current interest rates. When interest rates plummeted in the wake of the 2008 financial crisis, companies faced steep pension funding requirements while also struggling with recessionary market conditions. That led to the Moving Ahead for Progress in the 21st Century, or MAP-21, which provided pension funding relief by stabilizing interest rates with a corridor approach. It gave companies a bigger window of time in which to view interest rates, with the averaging out leading to smoother rates for calculation purposes.
The newest transportation funding bill delays the narrowing of that corridor to push likely increases in funding requirements into the future. “Phasing down the corridor means it’s less of an advantage, so minimum contributions were increasing again,” says Waidmann. “Now Congress has deferred it over five years.”
While the measure changes the minimum required contribution, it does not speak to the financial wisdom of any particular contribution level, according to Waidmann. “There are a lot of employers who probably won’t want to take advantage of this reduced minimum contribution,” she says. “It just kicks the pension funding can down the road, so they may have to put more in later. The provisions might provide a new reason for companies to review their pension funding strategies and consider alternatives as well, she says.