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The Contribution Conundrum for Underfunded Plans

August 30, 2020
  • Reduced PBGC variable rate premiums may make now an optimum time to contribute.
  • Plan sponsors undertaking risk-transfer activities in underfunded plans should consider contributing additional assets to maintain funded status equivalence.
  • For some plans, low borrowing rates may present an opportunity.

At the end of March 2020, the CARES Act was signed into law. One impact of this legislation for defined benefit plan sponsors is that any contributions that were required during 2020, either quarterly contributions or those to satisfy minimum requirements, can be delayed until January 1, 2021. However, sponsors with materially underfunded plans are facing the prospect of rising Pension Benefit Guaranty Corporation (PBGC) premiums, and many are considering lump sum offerings or other risk transfer activities in order to reduce the size of the pension plan on the corporate balance sheet, an activity which may further strain the funded status of the plan.

 

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