The new federal pension rules could help employers postpone as much as $63 billion in funding payments over the next 5 years.
Gaobo Pang and Mark Warshawsky, pension analysts at Towers Watson & Company, New York (NYSE:TW), write about that possibility in an analysis of recent changes in U.S. pension laws.
The new federal Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (PRA) has given defined benefit pension plan sponsors eagerly sought flexibility to make up funding shortfalls over a longer period of time.
The old rules, set by the Pension Protection Act (PPA) of 2006, have required sponsors to amortize funding shortfalls over 7 years.
The Worker, Retiree and Employer Recovery Act (WRERA) of 2008 has been letting employers cope with what are believed to be short-term fluctuations in asset values by using smoothed asset values.
“For minimum funding purposes, plan sponsors can measure pension liabilities using either the full yield curve (a 1-month average of interest rates) or the 24-month-average segment rates,” Pang and Warshawsky write.
The Internal Revenue Service (IRS) issued guidance in March 2009 that lets sponsors choose the most favorable interest rate for valuing 2009 plan liabilities, and another batch of IRS guidance will let sponsors switch to a different interest rate and asset valuation method for plan year 2010 without seeking IRS approval, the analysts say.
Plans also can switch from segment rates for 2010 to the yield curve for 2011 or a later plan year, the analysts say.
Now, the PRA pension funding provisions will let sponsors of underfunded pension plans chose either a 2 plus 7 rule or a 15-year amortization rule for any 2 years between 2008 and 2011.
Under the 2 plus 7 rule, the sponsor makes interest-only payments for 2 years followed by regular 7-year amortization.