Key Takeaways
- • The American Rescue Plan Act of 2021 (ARPA), signed March 11, 2021, changes the minimum funding rules for private-sector defined benefit pension plans, lowering required contributions for many sponsors.
- • ARPA replaces the interest rate corridor with a tighter corridor around historical rates that phases out in 2030, according to Callan, which expects higher discount rates and longer smoothing.
- • Under ARPA, shortfall amortization bases are reset to zero with a new 15-year amortization period, a change Cheiron says reduces minimum funding requirements.
- • ARPA sets segment rate corridors at 70% (low) and 130% (high) of the 25-year average and imposes a 5% floor, per Cheiron.
- • Both firms warn that lower contributions could raise PBGC variable-rate premiums and may affect the timing of pension risk transfers.
Summary
The American Rescue Plan Act of 2021 (ARPA), signed on March 11, 2021, includes funding relief for private-sector defined benefit plans. Analysis from Callan and Cheiron, as reported in two recent blog entries, outlines how the law will shape plan funding, contributions, and risk transfer strategy.
On discount rates, Callan notes that prior relief efforts used interest rate smoothing through rate corridors. Given current low rates, those corridors produced artificially high discount rates, lowering liabilities and contribution requirements. With those corridors scheduled to phase out by 2024, Callan says liabilities would rise, discount rates would fall, and contributions would increase. ARPA instead creates a tighter corridor around historical rates, fully phased out in 2030, which raises the discount rate and extends the period of smoothing.
Cheiron details two changes to minimum funding requirements. First, ARPA provides a "fresh start" for the first effective plan year: all shortfall amortization bases in their 7-year period are set to zero, a new 15-year base is created, and future bases receive a 15-year amortization period. The change is effective for plan years beginning after December 31, 2021, though sponsors may elect an earlier effective date of December 31, 2018, 2019, or 2020. Second, ARPA narrows and extends the segment rate stabilization corridor around the 25-year average, to 70% on the low end and 130% on the high end, and sets a 5% floor on that average. The segment rate change applies to plan years beginning after December 31, 2019, though sponsors may opt out for plan years beginning before January 1, 2022. Cheiron says these changes lower minimum funding requirements but do not affect segment rates used for lump sum calculations or the maximum deductible limit.
Callan expects the changes will not alter the investment policy of sponsors planning eventual liability transfers, since funding calculations are separate from insurer settlement pricing. However, some sponsors may revisit investment policy if PBGC premiums rise or if lower required contributions reduce the cash available to keep funded status growing. Callan expects higher discount rates and longer amortization periods to reduce contribution requirements most for plans with smaller normal costs or larger shortfalls, while warning that contributions would rise if smoothing is fully phased out. It describes the longer amortization period as providing "a permanent reduction in annual cash requirements."
Both Cheiron and Callan flag potential PBGC premium effects. Cheiron notes that variable-rate premiums may rise for plans that reduce contributions under the changes. Callan cautions that higher or uncapped PBGC premiums could influence full or partial pension risk transfer decisions, and that some sponsors may accelerate transfers to avoid higher costs.
On discount rates, Callan notes that prior relief efforts used interest rate smoothing through rate corridors. Given current low rates, those corridors produced artificially high discount rates, lowering liabilities and contribution requirements. With those corridors scheduled to phase out by 2024, Callan says liabilities would rise, discount rates would fall, and contributions would increase. ARPA instead creates a tighter corridor around historical rates, fully phased out in 2030, which raises the discount rate and extends the period of smoothing.
Cheiron details two changes to minimum funding requirements. First, ARPA provides a "fresh start" for the first effective plan year: all shortfall amortization bases in their 7-year period are set to zero, a new 15-year base is created, and future bases receive a 15-year amortization period. The change is effective for plan years beginning after December 31, 2021, though sponsors may elect an earlier effective date of December 31, 2018, 2019, or 2020. Second, ARPA narrows and extends the segment rate stabilization corridor around the 25-year average, to 70% on the low end and 130% on the high end, and sets a 5% floor on that average. The segment rate change applies to plan years beginning after December 31, 2019, though sponsors may opt out for plan years beginning before January 1, 2022. Cheiron says these changes lower minimum funding requirements but do not affect segment rates used for lump sum calculations or the maximum deductible limit.
Callan expects the changes will not alter the investment policy of sponsors planning eventual liability transfers, since funding calculations are separate from insurer settlement pricing. However, some sponsors may revisit investment policy if PBGC premiums rise or if lower required contributions reduce the cash available to keep funded status growing. Callan expects higher discount rates and longer amortization periods to reduce contribution requirements most for plans with smaller normal costs or larger shortfalls, while warning that contributions would rise if smoothing is fully phased out. It describes the longer amortization period as providing "a permanent reduction in annual cash requirements."
Both Cheiron and Callan flag potential PBGC premium effects. Cheiron notes that variable-rate premiums may rise for plans that reduce contributions under the changes. Callan cautions that higher or uncapped PBGC premiums could influence full or partial pension risk transfer decisions, and that some sponsors may accelerate transfers to avoid higher costs.
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