How Do You Balance a Budget?


Q: How do you balance a budget?

A (from Congress): Reduce future pension plan contributions.

Once again pension contributions are connected to budget deals in Washington, DC. The Bipartisan Budget Act of 2015 (BBA 2015) extends the interest rate relief from the Highway and Transportation Funding Act of 2014 (HATFA) for another two years. HATFA was an extension of the interest rate relief in the Moving Ahead for Progress in the 21st Century Act (MAP-21). Anyone else noticing a trend? When Congress needs more expected future revenue, pension contribution reduction has become the “go to” method. Contributions to pension plans are deductible. Plan sponsors are continuing to see increases in required contributions and in general like to see those requirements decrease. So pension relief is an easy sell.

So what exactly is the interest rate relief? Back in 2008 the Pension Protection Act (PPA) created a mandatory interest rate structure based on 24 month averages of corporate bond rates. Then the recession hit and asset values plummeted, along with interest rates (lower rates mean higher liabilities).

In 2012, Congress needed more money to fund highways so MAP-21 established a corridor around the 24 month average interest rates based on 25 year averages of the 24 month averages. The corridor started at 90% to 110% and was set to expand to 70% to 130% by 2016. So given the current interest rate environment, the required interest rates were 90% of the MAP-21 rates. In 2014, Congress needed more money to fund highways so HATFA extended the 90% to 110% corridor to 2017. The corridor would then expand out to 70% to 130% by 2021. In 2015, Congress needed more money to balance the budget so BBA 2015 extends the 90% to 110% corridor through 2019.

As a result, pension contributions in 2018 through 2022 will be less than they would be without the interest rate relief because the interest rates will be higher. But even under BBA 2015 rates will continue to go down as the high rates from 25 years ago are replaced by the current low rates.

The interest rates to determine maximum deductible contributions will not change so plan sponsors will have a lot of flexibility in deciding how much to contribute to their pension plans.

But not all the pension changes in BBA 2015 are good news for plan sponsors. PBGC premium were already set to increase and BBA 2015 makes those increases even larger.

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