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ARPA and Pension Plans: A Closer Look

Legislation

The ink on the American Rescue Plan Act of 2021 (ARPA), signed on March 11, is barely dry—but its effects are, and will be, far-reaching. Two recent blog entries zero in on some of the ways it will affect private-sector defined benefit plans, including funding relief. 

Discount Rates

Pre-ARPA, says Callan in “Relief Bill Provides a Shot in the Arm to Corporate Pensions,” funding relief efforts included interest rate smoothing. They argue that given current low rates, the impact of the rate corridors those previous efforts created would be “artificially higher discount rates,” which Callan says in turn would result in lower liabilities, higher liability discount rates and lower contribution requirements. But they say that with the phase out of those corridors impending by 2024, funding liabilities would increase, discount rates would drop and contributions would rise. 

ARPA, however, creates a tighter corridor around the historical rates fully phases out in 2030, says Callan. They say that the effects of this include raising the discount rate and extending the period of discount rate smoothing.

Minimum Funding Requirements

In “Single-Employer Pension Plan Funding Requirements Reduced,” Cheiron discusses two changes ARPA makes concerning the minimum funding requirements. 

Amortization Period. Under ARPA, there is “a fresh start” for the first effective plan year. All shortfall amortization bases which were in their 7-year amortization period will be set to zero. There will be one new 15-year amortization base, and there will be a 15-year amortization period for future amortization bases as well. 
Cheiron notes that this change is effective for plan years beginning after Dec. 31, 2021. Still, it adds, plan sponsors can choose to make the change effective for plan years beginning after Dec. 31, 2018, Dec. 31, 2019, or Dec. 31, 2020.

Segment Rates. ARPA modifies the stabilization of segment rates around the applicable 25-year average by narrowing and extending the timeframe until the low percentage is 70% and the high percentage is 130%. ARPA also establishes a floor of 5% on the applicable 25-year average of a segment rate before applying the corridor. 

Cheiron notes that the change in segment rates applies for plan years beginning after Dec. 31, 2019. However, plan sponsors may choose to not apply it to any plan year beginning before Jan. 1, 2022.

Why This Matters

Both argue that these changes matter for a variety of reasons.

Investment Policy. Callan expects that ARPA will not affect the investment policy of plan sponsors that plan to eventually offload liabilities, since funding calculations are unrelated to settlement pricing from insurers. But they suggest that some may consider changing their investment policy if PBGC premiums rise or if lower required contributions make it harder to get cash in order to keep the funded status growing for an eventual pension risk transfer. Less cash could result in delayed risk transfers, Callan suggests, until funded status is adequate to pay for those transfers.

Contribution Requirements. Callan expects that higher discount rates and longer periods for shortfall amortization probably will reduce pension plan sponsors’ contribution requirements. Further, they expect that effect to be greatest for plans with smaller normal costs and/or larger funding shortfalls.  
Callan continues that if smoothing is ever fully phased out, they anticipate contribution requirements would increase as discount rates “finally decline from historical highs to match market conditions,” but they also add that the longer amortization period “does provide a permanent reduction in annual cash requirements.”

The changes to the minimum funding requirements, Cheiron says, will result in lower minimum funding requirements. They will not affect segment rates used for other purposes such as calculation of lump sum benefits and the maximum deductible limit. 

PBGC Premium Rates. Both Cheiron and Callan suggest that in some cases, there may be consequences related to Pension Benefit Guaranty Corporation (PBGC) premium rates. The changes ARPA makes do not affect the segment rates used for a number of calculations, including PBGC variable rate premiums, Cheiron says. However, it adds, PBGC variable rate premiums may increase for plans that reduce contributions because of the changes.

For its part, Callan cautions that with the changes ARPA makes, decisions concerning full or partial pension risk transfer decisions may be affected if PBGC premium rates rise or are uncapped due to lower pension funding by single-employer plan sponsors. And if those rates rise, they add, some may accelerate risk transfers so as to avoid higher expenses for plan management.