The minimum contributions U.S. companies are required to make to their pension plans will rise significantly in coming years, according to a recent study by the Society of Actuaries, which says that increase could lead to more changes in the way companies manage their pension plans.
In the decade that ended in 2009, companies’ cash contributions to their defined-benefit plans averaged about $66 billion a year, according to the SOA study. It projects that minimum required contributions will average $90 billion a year in the decade that started in 2010 and hit a peak of about $140 billion in 2016.
The higher contributions reflect the damage done to pension funding during the financial crisis, according to the SOA. The study was released on the heels of a quarter in which the funded status of U.S. pension plans took another beating.
Actuarial and consulting firm Milliman estimates the funded status of the largest U.S. company plans dropped $252 billion in the quarter ended Sept. 30. At the end of September, the plans had an average funded status of 72.8%, down from 87.0% at the end of June.
The SOA says plan sponsors might respond to the higher contribution requirements by smoothing their contributions over time, making bigger payments than required when times are good so that they have a little more leeway in hard times. “By doing that, at least from a systemic perspective they’re building up some flexibility as to future requirements,” says Joe Silvestri, a retirement research actuary at the SOA and lead researcher on the report.
In fact, many companies already seem to be taking this approach. The SOA study shows that in 2008, employers contributed more than five times what they were required to pay, and in 2009 contributions were more than four times what was required, numbers that could signal companies are preparing for the increased contribution requirements in coming years.
Other approaches include lessening the volatility of a plan’s funded status by investing mostly in fixed-income securities, which behave more like a plan’s liabilities than do equities, or closing the plan to new entrants. A survey this year of more than 100 defined-benefit plans by SEI Investments showed that just 36% were active, while 36% were closed to new entrants, 30% were not only closed to new entrants but participants were not accruing additional benefits, and 3% were terminated.
The SOA report, The Rising Tide of Pension Contributions Post-2008, is here.