(July 19, 2012) — Corporate schemes are not better funded as a result of recently passed legislation on pension contributions, and could end up in a worse position, Russell Investments’ Bob Collie and Jim Gannon conclude.
The criticisms by Russell pertain to a law that provides companies in the United States a break on their pensions, allowing plan sponsors to contribute billions of dollars less – it was passed by Congress in June and signed earlier this month by President Barack Obama.
“If you adjust your scale to show a smoothed average of your weight over the past twenty-five years, or measure in kilograms rather than pounds, you do not get any lighter,” Russell noted on the issue. “And, make no mistake, a funded status based on a smoothed interest rate is just as much a different measure from a funded status based on a market rate as kilograms is a different measure from pounds.” In other words, according to the global asset manager and consulting firm, the true funding position of pension plans will likely be made worse by this legislation.
Moreover, from the perspective of corporate pension funds, it is still a question of pay-now-or-pay-later, the firm noted. “Changing the way in which contributions are calculated can accelerate or decelerate the pace at which funding is required from the plan sponsor, but ultimately the cost of the plan is whatever is needed to pay the promised benefits,” Russell claimed, noting that the legislation implemented by Congress has provided funding delay, not funding relief.
In terms of contributions, Russell noted that it is wise for plan sponsors to make up their funding shortfalls at the pace it can afford as opposed to contributing the minimum required. “It’s a tax-efficient thing to do,” Russell explained.
Russell is not alone in its wariness over Congress’s recent legislation that changes how pension plan liabilities are calculated for funding purposes. Some in the industry expect the law to have a minor impact on the nation’s roughly $1.9 trillion in pension assets. “While the new federal provisions reduce the minimum amount of minimum required pension contributions, we believe such relief only postpones funding improvements and that companies are still on the hook for billions in underlying obligations,” Fitch Ratings stated earlier this month.