Sponsors will fund rising contributions to private pension plans that are still recovering from the investment nosedives of 2008, according to a report released yesterday by the Society of Actuaries and American Academy of Actuaries.
In 2015 and 2016, they expect the peak projected contribution requirement, although the variance in requirements if 2011 asset return is between 18% and 19%. Contributions exceeded required levels by more than five times in 2008 and more than four times in 2009, which suggests employers have begun to fund their plans in advance of requirements.
"The results will not come as a surprise to sponsors; they're not just looking at next year’s projections but over the next several years," said Donald Fuerst, senior pension fellow at the AAA of plan sponsors who already see these projections in their own planning. According to the report, employers contributed an average of $70 billion per year over the five years ending in 2009. Required contributions are expected to average $90 per year between 2010 and 2020, reaching a peak of $140 billion in 2016. "The degree might come as a surprise; the minimums on one year can vary enormously four years out," Fuerst said.
A combination of economic factors has created challenges for many sponsors of private, single-employer defined benefit pension plans and they face a "rising tide" of minimum required contributions over the next five years.
The research shows the importance of plan sponsors continuing to manage their risks as the economic and regulatory landscape evolves.
"With how much sponsors are contributing there are a number of assumptions that go into this; we felt it was important to describe one of those major assumptions: a return on assets," said Joseph Silvestri, research actuary at the Society of Actuaries. Increased contribution requirements pressure the availability of cash of the affected employers as opposed to the profitability of those employers. "A negative return is going to have a significant impact, which will pile on to the existing challenge sponsors are working through," he added.
After the Pension Protection Act of 2006, the largest rewrite of retirement rules since ERISA in 1974, the markets tanked, many plans did not make the expected return under the benchmark and many plans lost substantial amounts in the market, either decreasing contributions or eliminating them completely. In response, the government gave temporary relief, but that will only prove to be temporary.
With increased contributions, employees and retirees have more secure benefits and less risk. Yet, the results pose interesting questions for sponsors to manage risk and make the pension system stronger.
"The affect on plan participants is varying, if they're able to, it will improve benefit security, if they're not able to, that could lesson retirement benefits," Fuerst said.
The report offered several solutions to sponsors, including adopting a contribution policy that "smoothes" actual contributions above minimum levels regardless of market performance. Shifting asset portfolios to reduce the effects of market volatility and declining interest rates would also lead to more sustainability.
"The de-risking strategy decreases the equity exposure of investments, which will lesson the volatility of contribution requirements in the future, but it doesn't necessarily lower them," Fuerst said. "If they're changing from equity to fixed income they may not generate equity in the future."
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