Pension Reform Will Increase Funding Requirements for Under-Funded U.S. Pension Plans: Transition Provisions Will Allow Companies Time to Prepare

Abstract

The Pension Protection Act of 2006 aims to improve funded status (i.e., difference between plan assets and pension obligations) of corporate defined benefit pension plans and to improve the financial condition of the Pension Benefit Guarantee Corporation (PBGC). Under the new law there is likely to be a more direct relationship between the funded status of a company's pension plans and its required pension contributions. The legislation, effective in 2008, contains a number of transition provisions to ease the switch from current rules, which will allow companies time to prepare. Once the law is phased-in, pension payments will be determined so as to fully fund the plan in seven years. In effect, the pension legislation will, over time, reduce one of a company's funding source — the pension plan. This special comment first describes the legislation's key provisions, and then discusses the likely impact on company economics and strategies. We conclude with its analytical implications. Lastly, we discuss the impact of provisions relating to multiemployer pension plans.