While Michael P. Barry’s recent post titled “Interest Rate Stabilization: It’s a Good Thing,” certainly does a fine job of summarizing the recent developments in defined benefit (DB) funding well, it may not be a good thing for all parties.
I agree that Pension Protection Act of 2006 (PPA) “solved the (very real) problem of inadequate funding” and did address the Pension Benefit Guaranty Corporation’s (PBGC) funding deficit. As a result, many or most private sector DB plans today are reasonably well funded. However, I believe that HATFA and ARPA will have a deleterious effect on plan funding.
Barry indicates that ARPA rates are 300 basis points higher than current market rates. Is this “good”? I think not. Michael suggests, however, that by creating flexibility in funding requirements, ARPA has created what he calls a “win-win-win” situation. Let’s review.
Some DB plan sponsors’ funding policy is to contribute the minimum amount required by ERISA, and not a penny more. Under ARPA, this amount—and these contributions—will likely decrease. This could cause funding problems for the 110% test[1], regarding restricted lump sum for certain highly compensated employees (HCEs). Further, not all plans are covered by the PBGC[2], so participants in these plans now potentially face more risk—but (still) lack the safety net of the PBGC. Even for plans that are covered, benefits above certain limits[3], or recently amended increases are not protected by the PBGC.
Plan sponsors probably “win,” as they now have more funding flexibility. As for the PBGC, that outcome is unclear—while the agency will presumably collect more revenue in premiums, stretching out the funding commitment may create greater risks down the road. And as for the participants counting on those benefits? Well, it sure doesn’t look like a “win” for them.
In summary, while I agree that plan sponsors have reasons to be happy with the enhanced financial flexibility provided by ARPA and HATFA, I’d hold off on the “win-win-win” celebration if I were a plan participant.
Footnotes
[1] https://www.law.cornell.edu/uscode/text/26/430
[2] https://www.pbgc.gov/wr/find-an-insured-pension-plan/pbgc-protects-pensi...
[3] https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee
David M. Lipkin, MSPA, is President of Metro Benefits Inc. He served as ASPPA President, 2014-2015.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
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