US - Employers with defined benefit (DB) pension plans could receive up to $63bn in temporary pension funding relief as a result of new legislation, research by Towers Watson suggests.
Under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, employers with underfunded DB plans can choose to amortise funding shortfalls for any two plan years between 2008 and 2011, either over a 15-year period or by making interest-only payments for two years followed by seven years of amortisation.
The firm said while the law may significantly ease financial pressures for sponsors in the short-term, employers face potentially larger funding obligations after 2011.
"The federal government has given employers the much-needed and welcome funding relief they were seeking," said Mark Warshawsky, director of retirement research at Towers Watson.
"Despite some improvement in the overall health of pension plans since the depths of the financial crisis, employers had been bracing for sharp increases in their DB funding obligations. Now, with the new law, employers can breathe a collective, albeit temporary, sigh of relief."
The Towers Watson analysis projected funded status and minimum required contributions for single-employer DB plans under three scenarios for the five plan years from 2009 through 2013: the pre-Act provisions and the two funding options under the new law.
The analysis found that, under the pre-Act provisions, the minimum required contributions in aggregate would be $78.4bn for plan year 2010, and would escalate to $131bn for 2011 and approximately $159bn for both 2012 and 2013.
Under the new law, however, required contributions would be reduced by between $19bn and $63bn, depending on which of the two provisions and which plan years employers choose.
"The pension funding relief law significantly eases some of the financial pressures employers had been facing, at least for two years," said Towers Watson senior consultant Mike Archer.
"However, the choices that employers make now will have an impact on the magnitude of their future pension funding obligations. In addition, the new law's cash-flow rule included in the legislation has the potential to make contribution requirements more volatile for companies that avail themselves of the relief."
In a separate survey earlier this month of 137 Towers Watson consultants on behalf of 367 employers, only one-quarter (25%) of plans are likely to elect the relief.
Many employers said they are concerned about the application of the cash-flow rule and uncertainties around details of the new law; others are pursuing aggressive funding policies, have good funded positions or otherwise do not need relief.
For those likely to elect the relief, most employers intend to reflect it for plan years 2010 and 2011 and use the 15-year amortization option.
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