• Reduced PBGC variable rate premiums may make now an optimum time to contribute.

• Plan sponsors undertaking risk-transfer activities in underfunded plans should consider contributing additional assets to maintain funded status equivalence.

For some plans, low borrowing rates may present an opportunity.

At the end of March 2020, the CARES Act was signed into law. One impact of this legislation for defined benefit plan sponsors is that any contributions that were required during 2020, either quarterly contributions or those to satisfy minimum requirements, can be delayed until January 1, 2021. However, sponsors with materially underfunded plans are facing the prospect of rising Pension Benefit Guaranty Corporation (PBGC) premiums, and many are considering lump sum offerings or other risk transfer activities in order to reduce the size of the pension plan on the corporate balance sheet, an activity which may further strain the funded status of the plan. Combining this backdrop with the current stress many businesses are under due to the pandemic-related economic slowdown, there is a natural tension between desiring to contribute more and having cash available to do so.

PBGC requirements and contribution deadlines

For calendar-year plans, the final date at which contributions can be made to increase beginning-of-year funded status for purposes of calculating PBGC unfunded vested liabilities is typically September 15. This is also usually the last day to fulfill contribution requirements. With the extension of this minimum funding deadline to January 1, 2021, there have been questions regarding the timing of contributions to reduce unfunded PBGC liabilities for variable-rate premium purposes. The PBGC recently issued guidance extending the deadline for making these contributions to October 15, 2020, which is the current due date for PBGC variable-rate premium filings.

Any assets contributed to an underfunded plan by this deadline would immediately earn an implied return of 4.5% in the form of reduced PBGC variable-rate premiums¹. This may be an attractive return, particularly with the assets not being invested for a full year.

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