Insurance Q&A

July 9, 2012

Law will cut defined benefit pension contributions, but increase PBGC premiums | Business Insurance

Filed under: Uncategorized — rrroark @ 1:45 pm

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via Law will cut defined benefit pension contributions, but increase PBGC premiums | Business Insu
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ASHINGTON—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 Friday.

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% of the average of those segment rates for the preceding 25-year period. In succeeding years, this 10% corridor would increase and top out at 30% in 2016.

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