President Barack Obama has signed into law legislation that will allow employers to slash their defined benefit plan contributions by billions of dollars throughout the next several years, but it also boosts their pension insurance premiums.
The pension-related provisions were included as part of a broader transportation funding bill, H.R. 4348, that President Obama signed July 6.
Under the new law, employers can use higher interest rates to value plan liabilities, thus reducing the value of the liabilities and the contributions they must make to the plans.
Employers will continue to value plan liabilities based on interest rates on top-rated corporate bonds for three different segments, averaged over 24 months. Segments refer to when benefits are paid to participants.
Under this methodology, interest rates that value plan liabilities are based on the maturity date of the corporate bonds. For example, interest rates on pension liabilities to be paid within the next five years will be based on corporate bonds maturing within five years.
Over the next decade, the interest rate changes will boost federal tax revenues by more than $9.4 billion, according to the congressional Joint Committee on Taxation. That is because using higher interest rates will decrease the value of plan liabilities, reducing required tax-deductible plan contributions, which in turn will increase employers' taxable incomes.
However, the actual interest rate for each segment in 2012 would have to be within 10 percent of the average of those segment rates for the preceding 25-year period. In succeeding years, this 10 percent corridor would increase and top out at 30 percent in 2016.
Due to this change in methodology, the interest rate used to value benefits paid over the next five years will increase roughly three percentage points, with smaller, though still significant, percentage increases for benefits paid beyond five years, experts say.
However, the new law also increases premiums that employers pay to the Pension Benefit Guaranty Corp., which has a $26 billion deficit in its insurance programs that guarantee most vested benefits to participants in plans the agency takes over from financially troubled employers.
All employers with defined benefit plans pay an annual PBGC premium of $35 per plan participant. The new law will raise the premium to $42 in 2013 and to $49 in 2014.
In addition, the law increases the variable rate premium that is assessed on employers with underfunded plans.
Under the law, the current variable rate premium of $9 per $1,000 of plan underfunding will be indexed to wage inflation starting next year. In addition, the premium will automatically increase by $4 per $1,000 of plan underfunding in 2014 and by $5 per $1,000 of plan underfunding in 2015.
However, regardless of the amount of the underfunding, the maximum variable rate premium cannot exceed $400 per participant.
PBGC Director Joshua Gotbaum preferred a different approach. In a statement this month, he said the agency would have preferred if Congress gave the PBGC would have been given authority to set premiums based on an employer's creditworthiness.