On August 8, the president signed the Highway and Transportation Funding Act (HATFA). Part of the revenue-raising in the Act provides for “pension smoothing” which is accomplished by resetting required interest rates used in minimum funding calculations back to the original corridor set in 2012 by MAP-21. The initial effect of this will increase the required interest rates and thus decrease minimum funding requirements to pension plans. The rates are effective for plan years beginning in 2013; however, plans may opt out for 2013. In many cases the 2013 actuarial valuation is already complete, so adopting the rates for 2013 would require revision of the valuation. In addition, some 2014 valuations are already complete, in which case a revision of the numbers will be required.
It is important to note that this smoothing does not remove any obligation from the plan sponsor to fund the plan to eventually pay all benefits. Also, PBGC premiums are unaffected by this act and since premiums are heavily determined by a plan’s under-funded status, smaller required contributions will result in larger PBGC premiums, especially given that the PBGC premium rate per $1000 of unfunded benefit value is increasing over the next several years.
Details from the Treasury are still forthcoming, but enough information is available for plan sponsors to start the decision-making process with guidance from their actuaries.
Blog authored by Cheryl Gabriel, CPC.