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The Rising Tide of Pension Contributions Post-2008

The Rising Tide of Pension Contributions Post-2008

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Published by jon_ortiz
An analysis of the condition of private-sector defined benefit pensions by the Society of Actuaries.
An analysis of the condition of private-sector defined benefit pensions by the Society of Actuaries.

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Published by: jon_ortiz on Oct 12, 2011
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10/12/2011

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The Rs Te  Pes Ctrbts Pst-2008:Hw mch a whe?
An analysis o unding or the U.S.private sector single-employer dened benet system
© 2011 Society o Actuaries, Schaumburg, Illinois
 
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Executive Summary
© 2011 Society o Actuaries, Schaumburg, Illinois
The economic recession o 2008-09 and consequentequity market downturn created many challengesor businesses and individuals. As the U.S. economycontinues to climb out o the latest recession, businessesthat sponsor single-employer dened benet pensionplans ace an additional challenge: rising levels o contribution requirements or their pension plans.This increase has been driven by the aorementionedeconomic actor, combined with alling interest rates thatdrive up the cost o providing dened benet pensions.This report provides a system-wide analysis o theexpected contribution requirements or the U.S. single-employer dened benet (DB) pension universe over theremainder o this decade. While the pattern o projectedcontribution requirements that we show in this reportis likely not a surprise to most individual plan sponsors,this report is unique in that we show the results o theaggregate system-wide eect. In addition, we evaluatethese results in the context o recent history — includingrecent regulatory and economic changes and how theindividual decisions being made have aected thepension system.This real-lie stress test provides valuable insight to thepension system. It shows that the minimum contributionrequirement is reactive to market cycles; as interest ratesor equity market returns all, expected contributionsacross the system rise quickly in response. In addition,it illustrates how highly sensitive the current system is toequity market returns, based on aggregate investmentallocation choices. Finally, it raises questions aboutwhether this cyclicality is good or the system. There arechoices that individual sponsors can make to combatthat cyclicality, and choices that regulators can makewith regard to the system as a whole. These choiceseach come with drawbacks that should be careullyconsidered. In addition, there are possibilities to thinkabout how to better design dened benet pensionplans, or their successors, to meet the challenges posedby the 21st century economy.Key ndings rom this research report include:
•Histrically,cashcntributinstprivatesectr
pension plans have generally exceeded minimumrequired levels. Over the ten years ending with2009, aggregate contribution levels averaged about$66 billion per year.
•Weexpectasignicantincreaseinthelevelf
uture contributions, based on the projected levelo required contributions. We project an averagelevel o about $90 billion per year over the ten yearsbeginning with 2010, peaking at about $140 billionin 2016.
•Cntributinsexceededrequiredlevelsbymre
than ve times in 2008 and more than our timesin 2009, which suggests that employers haveagain begun to und their plans in advance o requirements. These levels indicate that manyindividual plan sponsors are capable o managing
thefundingdemandsftheirplans.Hwever,there
will be employers or whom this “stress test” posesa greater challenge.
•Requiredcntributinlevelsaresensitivetthe
eects o equity market returns, as equity exposureremains signicant among the plans in the U.S.private pension system.
•Theresultsfthisresearchreprtpseinteresting
questions or both sponsors and policymakers withregard to improving risk management practice andmaking the system stronger.

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