At a trade organization with a single employer-defined benefit plan, managers voiced concerns about how their plan would meet the new minimum funding requirements mandated by the Pension Protection Act of 2006 (PPA). The nonprofit wanted to maintain all of the plan's current benefit provisions for its workers, including ongoing benefit accruals. It had made a $600,000 contribution for the 2006 plan year and already had met its minimum funding requirements for that year. The plan’s funded percentage on Jan. 1, 2007 was 77% without regard to making a final decision on additional contributions, if any, for the 2006 plan year, which were due by Sept. 15, 2007.
The plan sponsors expressed two goals: They wanted to hit PPA's early targets in order to qualify for the law's transition rules and preferred a level payment schedule through the 2014 plan year that did not require any large funding jumps from year to year.
Company goals get a reality check
In the scenario initially presented by Milliman, the organization would make a large additional contribution for the 2006 plan year to bring the plan’s funded percentage up to 90% by Jan. 1, 2007. This would qualify the plan for PPA's transitional funding rules, which would potentially ease minimum funding requirements for the next several years.
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To continue to be eligible for the transitional funding rules, the plan's funded percentage would need to reach 92% by Jan. 1, 2008; 94% by Jan. 1, 2009; and 96% by Jan. 1, 2010. If the plan’s funding percentage was less than 90% on Jan. 1, 2007, the plan’s minimum funding requirements would be determined based on a 100% funding target rather than the lower thresholds through the 2010 plan year.
This option (#1) was ruled out because the organization could not afford to contribute the necessary $2.1 million by Sept. 15, 2007.
Milliman presents alternative scenarios
Milliman then developed two additional options for this client. The second option would be to make no additional contributions beyond the current $600,000 for the 2006 plan year and to contribute only the minimum required contribution going forward. Although this option would result in smaller contributions in the short run, the plan would likely be funded significantly below the PPA 100% funding target by Jan. 1, 2008 and result in dramatically higher minimum funding requirements under the new PPA rules, beginning with the 2008 plan year.
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In option #2, the organization would continue its traditional $600,000-per-year contribution for 2006 and 2007. This would be followed by four years of $1.8 million contributions, after which the required amount tapered off gradually.
The third option would be to try to develop a level annual contribution pattern beginning with the 2006 plan year that would still meet minimum funding requirements. In this option, the organization would pay $1.4 million annually from 2006-2014, gradually bringing the plan to 100% funding by the deadline.
Even though option #2 would have meant lower annual contributions initially, managers selected option #3 because of their strong desire to have a level annual funding pattern. Company managers understood that actual contributions through 2014 may vary from the estimated contribution pattern if actual demographic experience and actual investment performance differ from the actuarial assumptions.
The importance of funded status
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Milliman also educated managers on the need to maintain a funded percentage of at least 80% under PPA.The managers understood that maintaining this funding level would avoid other issues as well, such as benefit restrictions, additional funding requirements for "at risk" plans and Pension Benefit Guaranty Corporation special filing requirements.
