Resolving Problems in Pension Plan Funding

Abstract

Three years of declining interest rates and equity values have severely stressed U.S. pension plan sponsors, who have seen hundreds of billions of dollars of “surplus” assets turn into underfunding. It is expected that in the coming decade, tens of billions of dollars will be diverted from investment in new equipment and new factories, and significant cutbacks will be made in employee compensation and benefits to fund this massive shortfall. Beleaguered companies are exploring or already implementing strategies to mitigate the cost and volatility of their pension plans. Although some of these strategies may provide short-term relief, without careful planning and informed decision making, these actions may have unintended and unacceptable consequences for plan sponsors and their employees. Employers should consider modeling assets and liabilities to determine if they are properly positioned for long-term adequate funding of their pension plans. Employers should further consider modeling the retirement income adequacy of benefits provided under their benefit programs to determine if the various sources of retirement income available to their employees will ensure an affordable retirement.