In the aftermath of the 2008–09 recession, Congress passed a series of bills with provisions aimed at alleviating the burden imposed on U.S. corporate defined benefit plans by low interest rates, among other things.

Under the most recent of these bills, the Bipartisan Budget Act of 2015 (BBA), corporate plans are entitled to discount future benefit payments by a rate equal to 90% of the 25-year average of bond rates. For most plans, this was an improvement over the terms originally set in the Pension Protection Act of 2006 (PPA), which allowed for a less generous discount based on a two-year smoothed average of bond rates.

While this may be beneficial for corporations right now, these advantageous terms are scheduled to phase out over the next few years. Starting in 2020 and continuing through 2024, the 90% discount-rate multiple used by the BBA will fall by 5% each year until it reaches 70%. This means that the differences between the BBA and PPA will become effectively negligible sometime within that four-year window, potentially leaving many plans with dramatic increases in minimum required contributions.

To better quantify the impact of this change, consider the hypothetical pension plan in Exhibit 1. Under the BBA, this hypothetical company has no minimum required contributions; under the PPA discount rate, it would need to fulfill a minimum required contribution of roughly $2 million.

The BBA also included provisions that increase variable-rate Pension Benefit Guaranty Corporation (PBGC) premiums. The combined increase in minimum required contributions and variable-rate PBGC premiums could lead to notable expenses that plans will need to brace for in the near future.

It is possible that Congress could intervene and pass yet another pension-funding relief bill extending the benefits of the BBA or introducing new relief that would shield plans from potential increases in their minimum required contributions. It is also possible that equity markets could tumble or interest rates could rise, further eroding the benefits of funding relief under the BBA and shortening the time period in which a plan may take advantage of them.

However, the key point remains the same. It's critical that U.S. corporate defined benefit plan sponsors consider the impact that the phasing out of the BBA provisions will have, devise a plan to reduce the gap between their liabilities and the market value of their assets, and address the potential rise in minimum required contributions.

Liability Value

Projected benefit obligation (PBO). Equal to PBO at start of year + service cost + interest cost +/- actuarial gain/loss +/- plan amendment gain/loss - benefits paid.

Funded Status

The amount by which a pension plan's assets exceed or are below the plan's projected benefit obligations (the amount the plan will have to pay in the future). The funded status is important because it indicates whether or not the plan is fully funded.

Minimum Required Contribution

Under IRS rules, this is the minimum contribution amount that can be paid without incurring a penalty.

Discount Rate

Interest rates on high-quality corporate bonds are used to discount a plan's future cash flows. The resulting present value is recognized as the liability.

  • The information contained herein is for illustrative purposes only and are the views of the Fiduciary Solutions Group based on data and information we believe is reliable. The information is provided for illustrative purposes only as a general discussion topic. Other factors related to the plan may have impacts that are not considered in our illustration. Strict reliance on this information is not recommended. Please consultant with your tax, legal and compliance teams on specific requirements and potential benefits relative to your plans circumstances before taking any action relative to future contributions funding relief noted in this reference piece.  The views in this presentation are provided by BNY Mellon Fiduciary Solutions (“Fiduciary Solutions"). Fiduciary Solutions is part of BNY Mellon Wealth Management, which operates through various operating subsidiaries of The Bank of New York Mellon Corporation, including BNY Mellon, NA and the Bank of New York Mellon (“BNY Mellon").This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon.

    This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

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    The information contained herein is for illustrative purposes only and are the views of the Fiduciary Solutions Group based on data and information we believe is reliable. The information is provided for illustrative purposes only as a general discussion topic. Other factors related to the plan may have impacts that are not considered in our illustration. Strict reliance on this information is not recommended. Please consultant with your tax, legal and compliance teams on specific requirements and potential benefits relative to your plans circumstances before taking any action relative to future contributions funding relief noted in this reference piece.  The views in this presentation are provided by BNY Mellon Fiduciary Solutions (“Fiduciary Solutions"). Fiduciary Solutions is part of BNY Mellon Wealth Management, which operates through various operating subsidiaries of The Bank of New York Mellon Corporation, including BNY Mellon, NA and the Bank of New York Mellon (“BNY Mellon").This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon.