Coming in 2009: The Perfect Storm of Pension Plan Funding

Market Crisis Combined with New Funding Rules Will Create Substantial New Liabilities and Benefit Restrictions

The global bear market, combined with the stringent new pension plan funding rules enacted by the Pension Protection Act of 2006 (PPA), has raised the specter of significantly increased funding obligations in 2009 for single-employer plans, as well as restrictions on the operation of underfunded plans and the funding of nonqualified plans. These restrictions may include:

• Restrictions on the payment of lump sum distributions, which will particularly affect cash balance and pension equity plans;
• Restrictions on any benefit increases, even pre-negotiated increases in collectively bargained plans;
• A prohibition on the funding of nonqualified deferred compensation plans while qualified plans are underfunded; and
• In extreme cases, a mandatory freeze on future benefit accruals and payment of plant closing and similar benefits.

Industry groups are lobbying Congress to grant relief from the new funding rules in light of the financial crisis, but there is no assurance that relief will be granted. All pension plan sponsors need to review the funded status of their plans before the beginning of the 2009 plan year in order to prepare for the effect of the new funding requirements. This memo (i) provides an overview of the PPA’s benefit restrictions and proposed regulations, (ii) discusses timing requirements and assumptions applicable to the benefit restrictions, and (iii) examines alternative funding options to avoid the imposition of benefit restrictions. This summary is not intended to be definitive guidance on this subject but rather a guidepost for conversations between plan sponsors and fiduciaries with outside consultants. This summary discusses only the rules applicable to single-employer plans. Different, but no less serious, issues apply to multiemployer plans.