On October 30, 2015, Congress passed the Bipartisan Budget Act of 2015 (BBA 2015), and President Obama is expected to sign it into law. This legislation includes three provisions that impact defined benefit pension plans:
- Congress further extended defined benefit pension plan funding stabilization provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012 and extended in the Highway Transportation Funding Act of 2014 (HATFA).
- The act increases Pension Benefit Guaranty Corporation (PBGC) premiums for pension plan sponsors and accelerates premium due dates for plan year 2025.
- BBA 2015 will allow pension plan sponsors to apply to the Treasury Department to use custom mortality tables based on plan experience for the purposes of determining funding, PBCG premiums, and benefit restrictions.
Pension Funding Relief Extension
Corporate pension plan sponsors are required to estimate their plans’ funded status on a regular basis to determine the adequacy of assets to meet benefits promised to participants. To calculate this estimate, actuaries attempt to determine the value of future benefit payments (the liability) in today’s dollars, which they then compare to current assets. During this time-value-of-money exercise, actuaries discount future payments by an assumed interest rate, often referred to as the discount rate. When this discount rate is higher, the present value of liabilities is lower and vice versa.
BBA 2015 impacts minimum contributions required by plan sponsors. It extends provisions previously included in MAP-21 and extended in HATFA that prescribe artificially high interest rates, higher funding measures, and therefore, lower minimum required contributions. Bottom line: if pension plan sponsors contribute less to pension plans, they will receive a smaller tax deduction, resulting in increased tax revenues that offset other costs included in the budget.
MAP-21 allowed actuaries to shift from using a 2-year average of interest rates based on maturity to use of a corridor around 25-year averages. Actuaries reference the 2-year average of interest rates at a given maturity. If that number is below the corridor as defined in Table One, actuaries use the minimum rate relative to the 25-year average. This table demonstrates the change in the minimum corridor as prescribed under MAP-21, HATFA, and BBA 2015.
In short, the passage of this legislation provides reduced required contributions to pension plans through 2022.
Higher PBGC Premiums
The PBGC insures retirement income up to certain levels for private sector workers entitled to defined benefit pensions. It is primarily funded by premiums charged to pension plan sponsors. These premiums have been increasing over recent years due to the number of bankruptcies at large corporations with pension plans.
PBGC premiums incorporate two components. The first component is a flat rate charged for each participant in a plan. The second is a variable rate component based on the degree to which a plan is underfunded. The details of these premiums are shown in Table Two below. Additionally, premiums are subject to a cap (not addressed here). The increases highlighted in Table Two for plan years 2017 through 2019 are associated with BBA 2015. This legislation will also generally accelerate premium payment dates by a month in 2025.
In short, by 2019, PBGC’s flat-rate and variable-rate premiums will have increased by more than 150 percent and 340 percent, respectively, since 2007.
More Flexible Mortality Tables
Pension actuaries utilize mortality tables prescribed by the Treasury Department to determine how long participants will live and collect benefits for funding purposes. In 2014, the Society of Actuaries released two new tables that dramatically increased how much plan sponsors owed participants in present value terms. The Treasury is widely anticipated to adopt similar tables in 2017. BBA 2015 will allow plan sponsors to apply to the Treasury to utilize tables based on plan-specific experience, as opposed to Treasury-prescribed tables, thus allowing more flexibility.
In short, plan sponsors will have more flexibility, subject to Treasury approval, in determining mortality tables used for funding purposes.
As always, we are committed to monitoring these changes and the implications to our clients and stand ready to assist you as you evaluate BBA 2015’s impact on your organization.
 The Bipartisan Budget Act of 2015, accessed October 30, 2015, https://www.congress.gov/114/bills/hr1314/BILLS-114hr1314eah.pdf.
 Moving Ahead for Progress in the 21st Century Act, accessed October 30, 2015, http://www.gpo.gov/fdsys/pkg/BILLS-112hr4348enr/pdf/BILLS-112hr4348enr.pdf.
 The Highway and Transportation Funding Act of 2014, accessed October 30, 2015, http://www.gpo.gov/fdsys/pkg/BILLS-113hr5021enr/pdf/BILLS-113hr5021enr.pdf.
 The Bipartisan Budget Act of 2015.
 Pension Benefit Guaranty Corporation Premium Rates, Accessed October 30, 2015, http://www.pbgc.gov/prac/prem/premium-rates.html.
 The Bipartisan Budget Act of 2015.