Human Capital & Careers

Survey: No Fretting Over Pension Rules

Companies contend that the Pension Protection Act (PPA) of 2006 will have a relatively modest affect on their pension plan contributions.
Stephen TaubOctober 10, 2006

Much ado about nothing, again. Last week, credit rating agency Moody’s Investors Service issued a notice saying that the affects of the new pension accounting rule would be modest in terms of corporate ratings. This week, company executives seem to be saying the same thing about rules governing corporate sponsors of traditional pension plans.

According to a new Towers Perrin survey, a large number of survey corporate respondents expect the Pension Protection Act (PPA) of 2006 to have a relatively modest affect on their pension plan contributions. “Despite the new law’s more stringent funding requirements, most of the survey respondents continue to view the costs and financial risks associated with their pension plans as manageable,” said Bill Gulliver, principal and chief actuary for Towers Perrin, in a press release. “Many of these companies also expect that they will continue to offer the same level of pension benefits in this new funding environment as they have in the past, at least in the near term.”

The study pointed out that existing rules require plan sponsors to have up to a 90 percent funded ratio, as determined on a plan solvency basis. The new law increases that target to 100 percent. “This represents a substantial increase in the near-term financial commitment for many plan sponsors,” said study authors.

The study also said that that two-thirds of the 126 survey respondents—corporate executives, primarily financial executives from midsize and larger organizations—expect that the new law will result in higher levels of required pension plan contributions for their organizations. In addition, 10 percent of companies anticipate very significant increases of 25 percent or more.

However, 44 percent—or nearly half—expect more moderate increases of 10 percent or less. And 4 percent expect the new rules to lead to reduced contribution levels. “The relatively modest anticipated impact on required contribution levels for many companies probably helps explain why the vast majority of respondents continue to view the financial risks posed by their pension plans as manageable,” Gulliver wrote in the study.

Most companies seem at least reasonably confident that they will be able to manage their organizations’ pension plans in the new PPA funding environment. According to the survey, 39 percent of the respondents believe their companies are well prepared to handle the added complexity of the new funding rules, while more than half (53 percent) say they are at least somewhat prepared.

Not surprisingly, the survey further documents the overall movement away from the traditional defined benefit plans. More than one-third of the companies said that they have already closed their largest pension plans to new hires, and 11 percent have frozen plan benefits. In other words, no additional pension benefits accrue.

In fact, on Tuesday The Hershey Co. became the latest prominent company to alter its defined-benefit plan. The food company said that beginning with the new year, it will provide future benefits at a reduced rate for current employees and close the plan to new employees hired on or after January 1.

As is often the case when companies scale back their traditional pension plans, Hershey officials also said they would increase the company match in the 401(k) plan. Specifically, it will match 75 percent of the first 6 percent of pay contributed by the employee. In addition, future retirement benefits for executives participating in the Hershey’s supplemental executive retirement plan (SERP) will also be reduced.

Hershey is not alone in closing the plan to new hires. Towers found in its survey that 17 percent of respondents with fully operating plans intend to close their plans to future hires as a result of the new PPA requirements, while 5 percent plan to freeze benefits for current participants. However, almost half (49 percent) of the these companies plan to continue their current pension plans with the same or similar benefits as are offered today, and another 9 percent plan to continue their plans while reducing future benefit accruals.

Said Gulliver in the press release: “This suggests that traditional defined benefit plans will likely continue to cover a significant minority of the country’s workforce, despite the changes in the regulatory environment.”

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