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U.S. Master Pension Guide, 2012 Edition
Part of CCH's Master Series of professional guidebooks. The book provides a comprehensive explanatory overview of qualified retirement plans and other retirement arrangements, reflecting up-to-date law changes and regulations. Benefit COLAs, calendars, and tables reflect the year 2012 figures.
From Spencer's Benefits Reports: Unless some changes are made during the current economic crisis, many defined benefit plans could be frozen, placing participants at additional financial risk, according to experts at Watson Wyatt.
“No one could have predicted the disruption that has occurred in our financial markets and the resulting impact on defined benefit plan sponsors,” said Gene Wickes, global director of benefits consulting at Watson Wyatt. “New pension funding rules will squeeze pensions at exactly the wrong time, and both companies and workers will bear the consequences. When Congress reconvenes, we urge them to take a common-sense approach to pension funding that reflects current economic conditions, not one based on theoretical models. Workers’ retirement benefits are at stake.”
The business community is advocating temporary provisions and technical corrections to soften the transition from the old rules to the new ones, which were passed in 2006 but take effect this year. Although the Senate has proposed such a plan, it is unclear whether Congress will take up the issue after Thanksgiving.
Companies fund their pensions based on the value of plan assets relative to future retirement payouts. Reflecting the long-term nature of pension plans, old funding rules allowed pension sponsors to smooth their asset values based on market returns over a four-year period. The PPA reduced this to a two-year period and changed the “smoothing” method permitted under the old law to an “averaging” method. Smoothing allows sponsors to take expected investment returns into account when calculating asset values, while averaging does not. The use of the averaging method is expected to produce values that are less than market value, while the use of the smoothing method is expected to produce values that are approximately equal to market value.
“Marking-to-market at the end of every day [a method of accounting for an asset based on the calculation of its current market value] might make sense for day traders, but it creates chaos for a plan sponsor trying to budget the costs of retirement plans being funded over 30- or 40- year time horizons, “ said Mr. Wickes. “Without some relief, a sustained downturn in asset values will noticeably increase required contributions to pension plans starting next year, when plan sponsors will also be facing significant business pressure.”
Conclusion
In 2007, the rise in interest rates and positive market returns restored most pension plans to solid funding levels, according to Watson Wyatt: “On average, firms seem to be slowly ramping down their equity exposure but still hold large portions of equity, which can cause short-term volatility.”
“These weaker funding positions will necessitate larger cash contributions from sponsors at a time when both market values and profitability are lower, which could present some cash flow challenges to some companies,” said Watson Wyatt. “Fortunately, most plan sponsors should be able to avert a serious disturbance. This is especially true for financial institutions, whose pension funds are still well-funded, more so than in most industries.”
Watson Wyatt also noted that “while pensions pose some risks, especially during an economic downturn, turbulence in the financial markets emphasizes the investment risks to the growing number of employees with only a 401(k) plan for retirement income. Various HR risks come into play as employees’ retirement nest eggs shrink. Many older workers might have to delay retirement, which could pose productivity issues and increase long-term costs for employers, such as for health care and compensation.”
For more information, visit http://www.watsonwyatt.com.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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