Contributions Will Determine How Pension Funding Swings

An analysis by Russell found that its representative plan was 84.2% funded and its representative mature plan was 79.4% funded. July’s incremental improvement was found to be fueled by solid equity market performance, with no significant change in the discount rate used to value liabilities.

Despite these gains, September 15 is a date looming large for many pension plan managers. The Russell representative plans assume that contributions are equal to benefit accruals and have no net effect on funded status. However, that assumption does not apply to many real plans, Russell said. Contributions can have a big impact, especially as the latest possible date—viz., September 15—approaches for plan contributions that can still count toward the 2012 funded status calculation for calendar-year plans (that is, those plans whose annual valuation is carried out on December 31).

Russell noted in the analysis that it expects to see marked differences in the ways corporations choose to make their contributions, given the flexibility offered by MAP-21 [the Moving Ahead for Progress in the 21st Century Act]. In many cases, Russell expects plan sponsors to find it in their best interests to contribute more than the required minimum.

In some cases, said Russell, these contributions will push plans past trigger points in their glide paths, causing a change in asset allocation policy. According to the analysis, this will result in such new money landing in fixed income or LDI strategies.