Government legislation changes to help provide pension funding relief

Global Retirement Trends


Overview

At the end of 2020, global corporate pension liabilities reached a record year-end total of USD8 trillion; however, 2020 also saw a record USD120 billion of single-premium pension risk transfer transactions. This record-breaking year was the result of myriad factors including strong asset performance leading to improved funding levels, competitive pricing, keen employer and fiduciary/trustee board interest for removal of risks, and significant (re)insurance market appetite.

A key area of focus is the challenges faced by employers globally in funding their pension plans in the wake of the COVID-19 pandemic. Governments are enacting legislation to provide relief given the importance of retirement plans to support employee retirement outcomes. As one example (see below), the American Rescue Plan Act of 2021 includes funding relief provisions for U.S. single and multi-employer pensions. The Canadian Federal Budget release on April 19th, and European relief packages, have looked to provide pension support as well. It is critical for organizations to understand these provisions and their implications.


The American Rescue Plan Act of 2021: Observations and Implications for Single and Multi-Employer Plans

The American Rescue Plan (H.R. 1319), was signed by President Biden on March 11, 2021. This bill includes pension funding provisions impacting both single employer and multiemployer plans. Plan sponsors are encouraged to consult with their actuarial contacts for specific guidance, but at a high level here are 5 takeaways to consider for each type of pension plan:

Single employer observations and implications:

  • The single employer relief includes an extension of interest rate stabilization and shortfall amortization periods. Certain aspects of this relief are permanent and will have a longer-term impact on funding requirements.

  • Plan sponsors have multiple options for when these provisions can take effect. The extension of interest rate stabilization is effective in 2020 by default, but it can be deferred to as late as 2022. The extension of shortfall amortizations is effective in 2022 by default, but it can be applied as early as 2019.

  • The optimal effective dates for a plan sponsor will depend on plan-specific and sponsor-specific factors. For very underfunded plans, earlier application may result in the greatest reduction in contributions; for moderately well-funded plans, the situation may be more complex. Detailed analysis will be needed to facilitate informed decision-making.

  • Decreased interest rate sensitivity of liabilities may have implications for de-risking glide-paths, making hedge path strategies more compelling in a low interest rate environment. In addition, since the new rules reduce contributions, they may slow de-risking progress for plan sponsors taking advantage of the relief. This could lengthen their time horizon for investing and make illiquid and return-seeking assets more attractive.

  • The funding relief does not change PBGC premium rates for single employer plans. Employers taking advantage of lower minimum required contributions may face higher variable-rate premiums unless they are at the variable-rate premium cap. This may lead more sponsors to consider contribution strategies other than the minimum. Pension settlement strategies via lump sums and annuity purchases also remain attractive, especially for plans at the cap.

Multiemployer observations and implications:

  • The multiemployer relief includes changes to reduce minimum contribution requirements in the near term (though this may not translate to contribution reductions for participating employers), a new program to provide assistance to financially troubled plans through 2051, and increased PBGC premiums starting in 2031.

  • The financial assistance is funded by a transfer of Federal revenues and does not need to be repaid.

  • Many details of how this program will work remain to be clarified through PBGC guidance. Since the financial assistance does not cover benefits payable after 2051, further action may be needed in the future if a troubled plan’s financial status does not substantially improve in the interim. The legislation does not include fundamental reform of multiemployer plan funding requirements, so plans’ financial condition could deteriorate in the future.

  • Contributing employers may want to assess the potential change in their risk exposure as a result of the legislation.

  • Companies that were looking to exit a multiemployer plan prior to its projected insolvency, or to avoid potential exposure to mass withdrawal liability, may now have more runway if a plan is eligible for financial assistance.

Aon retirement consultants globally are available to provide guidance on recent regulatory changes and provisions for pensions. Please contact your Aon team to learn more.