Obama Law Against the Trend of De-Risking Pension Plans
Lately we have seen growing interest from clients looking for legal assistance with de-risking their pension plans, whether such plans are frozen or continue to accrue benefits as active plans. Pension liabilities may significantly impact corporate balance sheets, so CFOs are interested in any alternatives available to the status quo.
Many plans are either considering or already offering lump sum windows to participants in pay status, thereby reducing PBGC premiums and eliminating liabilities from the corporate books. Just since May, the IRS issued five private letter rulings supporting these lump sum windows by holding that the lump sum offers do not violate the minimum distribution requirements in Code Section 401(a)(9). Other employers are jumping on the de-risking bandwagon by shifting investment objectives and policies to implement a strategy that seeks to match the risk and duration of a plan’s investments with the liabilities and funding obligations, as opposed to using the age-old “total return” philosophy. Still others transfer the risk to third parties through the purchase of annuities. In any event, all of these strategies are revolved around the idea of paying their retirees what they are owed.
Despite this momentum by employers to squarely face their pension liabilities and address funding and buy-outs in a responsible manner and keeping their promises to employees, President Obama last week signed into law the Highway and Transportation Funding Act of 2014. This Act contains pension funding provisions that seemingly ignore the need for employers to better-fund their pension plans and reduce liabilities. This Act’s revenue-generating provisions extend the “pension-smoothing” tactics which allow employers to delay making mandatory pension contributions. Under this Act, companies may base their pension liability calculations on the average interest rate over the past 25 years rather than over the past two years – using this higher average interest rate artificially reduces the present value of future liabilities. However, this gimmick accounting does not actually reduce the obligations for payments to retirees.
Rather than helping employers de-risk their pensions so that they may make good on their promises, this law may likely increase pension deficits and perhaps trigger more defaults by companies. This is an example of robbing retirement funding to pay for unrelated but immediate expenses for road repairs and improved bus transportation. But perhaps it makes sense that this punting of pension liabilities really is directly related to the need for improved highways and transportation. After all, U.S. workers will likely need efficient transportation to get to work for a long, long time.