US. Despite Temporary Tax Advantage, Companies Pouring Money into Pension Plans Should be Prepared to Face an Increase in Future Funding Obligations
Many US corporations have been taking steps to make big contributions to their pension plans and close funding gaps because of current tax advantages, which have a September 15, 2018, deadline. But investment firm Cambridge Associates cautions that a focus on this near-term opportunity should not cause plan sponsors to overlook the rising long-term challenges to funded status that lie ahead.
While the near-term result could be improved funded status for a given plan and company, it does not promise relaxed contribution obligations going forward. In a new report by Cambridge Associates, Time for a Reset? Rethinking Contributions Policy, the firm encourages chief financial officers and other financial executives to consider three events on the horizon which could increase many companies’ pension contribution obligations over the next five years: new mortality tables, the trailing off of regulatory funding relief programs for pensions, and the gradual depletion of many pensions’ ability to carry forward a “credit balance.”
“Even if a company has made a large pension contribution to maximize the tax benefits and realize significant cost savings, there’s likely no pension funding ‘vacation’ on tap. In fact, minimum contributions may rise over the next several years,” says Justin Teman, Senior Actuarial Investment Director and author of the report.
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