Should I be alarmed at the following info contained in my former
employer's Annual Funding Notice for Retirement Plan?
With MAP-21 rates, fund is at 101%, without it is at 86%, for 2012.
Whatever that means.
"This is a temporary supplement to your annual funding notice. It is
required by a new federal law
called the Moving Ahead for Progress in the 21st Century Act (MAP-21).
MAP-21 changed how
pension plans calculate their liabilities. The purpose of this
supplement is to show you the effect
of these changes. Before MAP-21, pension plans determined their
liabilities using a two-year
average of interest rates. Now, pension plans also must take into
account a 25-year average of
interest rates. This means that MAP-21 interest rates likely will be
higher and plan liabilities
lower than they were under prior law. As a result, your employer may
contribute less money to
the plan at a time when market interest rates are at or near historical
When a pension plan looks at its assets and projected future
liabilities, they have to take
the future liabilities and discount them using some interest rate to
get an idea of how much
they need in assets now to cover those future liabilities.
Like normal bond math, the lower the interest rate used, the higher the
value. If they discount those future pension payout costs using a low
interest rate, they
need a much higher current asset base to pay those future liabilities.
Under MAP-21, they are using a different and new set of rules to come
up with the interest
rates they use to discount their future cash-flow payout obligations.
For all segments,
the MAP-21 rates are much higher. (google MAP-21 and look for an IRS
bulletin about it).
The short story is this: these rates don't change the amount of money
which is in
the pension plan, nor the pensions plans future payout obligations.
They are only
used in judging how much over or under-funded the pension plan is. And
if the pension
is severely underfunded, the employer may be obligated to make higher
the plan in order to get it to catch up. So it may be considered a
measure of the
financial strength of the pension plan (since, if the pension plan
really is underfunded
and the employer goes out of business, they'll never be able to pay
into it enough in
the future and *then* some of the payouts may get cut).
Part of the reason for MAP-21 was that today's extremely low interest
rates made the
current value of future pension obligations extremely high and
therefore made pensions
look even more underfunded than, perhaps, they should be considered to
be. This was
a means of regulatory relief to keep certain companies from having to
shove as much
money into their plans right now. Whether that's good or bad is not
clear. A company
which has to shove too much into the pension plan may be weakening the
company itself -
which may be worse than a currently underfunded pension if it leads the
Another part of the reasoning behind MAP-21 (note that these pension
provisions are part of a *highway* funding bill) was that if companies
don't have to
shove as much money into their pensions, those same companies don't get
as big a
tax break (because money shoved into the pensions lowers their tax
bill). So this
is both regulatory relief for pension-sponsoring companies as well as a
revenue-raiser for the federal government.
It also included a small increase in the premiums that pension plans
have to pay
to the PBGC, the government agency which guarantees pension funds. This may be
a good thing - the more companies go bankrupt and turn their pensions
over to the
PBGC, the more the PBGC gets into trouble.
I don't know that you should be "alarmed." There isn't anything you
can do about it
one way or the other.
Do review how much you hope to get from your pension. And make sure you have
other savings in place, too. If your pension is underfunded, and your employer
goes under and the pension is turned over to the PBGC, you may get a much lower
payout from the pension than you thought you were going to get. Google for
"PBGC maximum benefit" to get an idea of those limits.