The Society of Actuaries released in June a report that analyzes provisions in the Moving Ahead for Progress in the 21st Century Act that would affect pension funding requirements in private, single-employer defined benefit plans.
The Moving Ahead for Progress in the 21st Century Act (MAP-21) was passed by the Senate on March 14 and focuses largely on public transportation and highway safety. However, the bill contains several provisions that would affect private pensions.
“What we’re trying to do is provide analysis on the bill,” Joe Silvestri, an actuary at SOA and lead researcher for the report, told AdvisorOne on Friday. “We have no opinion on the bill itself or its merits. It must be considered in the larger context of the voluntary defined benefit system.”
Section 40312 of the bill states that the interest rate used to measure pension obligations would be constrained within a specified range. As such, the provisions “challenge one of the fundamental aspects of the Pension Protection Act of 2006 (PPA)—that calculated pension obligations closely track market conditions,” Silvestri wrote in the report. Over the next several years, Silvestri wrote, the provisions would create a pattern of interest rates that reduce contributions at first, then subsequently increase them annually until they exceed the level required by current law.
“Plan sponsors need to keep that pattern in mind when they budget for contributions,” Silvestri (left) said.
Furthermore, because those interest rates are set for several years, changes in the market level of interest rates would have little effect on funded statuses and contribution requirements. The provisions don’t address non-interest rate sources of volatility like asset returns, so they would continue to affect contribution requirements.
The short-term effects of MAP-21 would be significant, Silvestri wrote. Contribution requirements and solvency levels would fall, and reduced contribution requirements would give plan sponsors more flexibility to invest in their business. This could lead to long-term consequences, though, as sponsors would have to plan for subsequent increases in requirements.