© 2011 Society o Actuaries, Schaumburg, Illinois
The economic recession o 2008-09 and consequentequity market downturn created many challengesor businesses and individuals. As the U.S. economycontinues to climb out o the latest recession, businessesthat sponsor single-employer dened benet pensionplans ace an additional challenge: rising levels o contribution requirements or their pension plans.This increase has been driven by the aorementionedeconomic actor, combined with alling interest rates thatdrive up the cost o providing dened benet pensions.This report provides a system-wide analysis o theexpected contribution requirements or the U.S. single-employer dened benet (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 eect. In addition, we evaluatethese results in the context o recent history — includingrecent regulatory and economic changes and how theindividual decisions being made have aected thepension system.This real-lie 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 careullyconsidered. In addition, there are possibilities to thinkabout how to better design dened benet pensionplans, or their successors, to meet the challenges posedby the 21st century economy.Key ndings rom this research report include:
pension plans have generally exceeded minimumrequired levels. Over the ten years ending with2009, aggregate contribution levels averaged about$66 billion per year.
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.
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
will be employers or whom this “stress test” posesa greater challenge.
eects o equity market returns, as equity exposureremains signicant among the plans in the U.S.private pension system.
questions or both sponsors and policymakers withregard to improving risk management practice andmaking the system stronger.