Pension Funding Proposals Being Considered

• Loosen restrictions on asset smoothing. Widen the corridor that limits smoothed values to 10 percent of the fair market value of plan assets to 20 percent through the 2010 plan year.
• Allow new interest rate elections beginning with the 2010 plan year. Sponsors would not be bound by elections made before the current proposed regulations are made final (i.e., this would allow sponsors who elected to use the spot yield curve for 2009 in order to avoid unaffordable contributions to elect the smoothed segment rate for 2010 and later years).
• Allow separate amortization for 2008-2009 losses. Plans could elect either:
  • The "2+7" Transition: For the first two years after the 2008 losses appear as a funding shortfall, the plan would be required to pay the interest on the losses to prevent the shortfall from growing -- after that two-year period the seven-year amortization would begin. A minimum funding amount would apply based on the amount contributed in 2008.

  • Extended Level Amortization: The 2008 losses would be funded over a fifteen year amortization period.

• Require safeguards if separate amortization is elected. If either alternative is elected to separately amortize the 2008 losses, the sponsor would have to agree not to freeze an ongoing defined benefit plan (or, if the defined benefit plan using the relief is frozen as of December 31, 2008, agree not to suspend matching contributions for non-highly compensated employees under its 401(k) plan). This requirement could be limited to the value of the funding relief.
• Apply funding-based benefit accrual restrictions on 2008 funding level. Benefit accrual restrictions (i.e., which prohibit future benefit accruals where the plan's funding level falls below 60%) would be based on the plan's 2008 funding level for the 2009 and 2010 plan years (i.e., the relief provided in the Worker, Retiree, and Employer Recovery Act would be extended).
• Allow use of credit balances. The 2008 funded status would be deemed to remain in effect for 2009 and 2010 for purposes of determining whether the plan may use its prefunding balance or funding standard carryover balance in the next year.
• Modify the date PBGC determines guaranteed benefits. In the event a plan is terminated during a bankruptcy proceeding, the date for determining the PBGC guaranteed benefits would be the date of plan termination (i.e., the rule prior to the Pension Protection Act (PPA) of 2006 would be reinstated).
• Modify the funding reporting requirements. Reinstate the pre-PPA requirement that plans which are underfunded by $50 million or more have to annually report to the PBGC.
• Clarify that investment expenses are not plan-related expenses. Clarify that investment expenses are not "plan-related expenses" included in target normal cost. While PPA technical corrections included "plan-related expenses" in normal cost, investment expenses have never been so included and would involve a substantial one-time change.
• Require future benefit enhancements to be funded. Future ad hoc benefit enhancements that can be paid to a limited group of participants in a lump sum would have to be immediately funded if the plan's funding level is less than 120 percent after the cost of the enhancement is taken into account.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2009, Deloitte.

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