Should I be alarmed at a “MAP-21” notice in my employer’s pension information?

A recent poster to the misc.invest.financial-plan newsgroup asked about a MAP-21 notice as part of the information from his employer’s pension plan.  Below, you’ll find our response:

Should I be alarmed at the following info contained in my former employer’s Annual Funding Notice for Retirement Plan?

 

With MAP-21 rates, fund is at 101%, without it is at 86%, for 2012. Whatever that means.

When a pension plan looks at its assets and projected future liabilities, they have to take the future liabilities and discount them using some interest rate to get an idea of how much they need in assets now to cover those future liabilities.

Like normal bond math, the lower the interest rate used, the higher the effective current value.  If they discount those future pension payout costs using a low interest rate, they need a much higher current asset base to pay those future liabilities.

Under MAP-21, they are using a different and new set of rules to come up with the interest rates they use to discount their future cash-flow payout obligations.  For all segments, the MAP-21 rates are much higher.  (google MAP-21 and look for an IRS bulletin about it).

The short story is this:  these rates don’t change the amount of money which is in the pension plan, nor the pensions plans future payout obligations.  They are only used in judging how much over or under-funded the pension plan is.  And if the pension is severely underfunded, the employer may be obligated to make higher contributions to the plan in order to get it to catch up.  So it may be considered a measure of the financial strength of the pension plan (since, if the pension plan really is underfunded and the employer goes out of business, they’ll never be able to pay into it enough in the future and *then* some of the payouts may get cut).

Part of the reason for MAP-21 was that today’s extremely low interest rates made the current value of future pension obligations extremely high and therefore made pensions look even more underfunded than, perhaps, they should be considered to be.  This was a means of regulatory relief to keep certain companies from having to shove as much money into their plans right now.  Whether that’s good or bad is not clear.  A company which has to shove too much into the pension plan may be weakening the company itself – which may be worse than a currently underfunded pension if it leads the company itself to fail.

Another part of the reasoning behind MAP-21 (note that these pension adjustment provisions are part of a *highway* funding bill) was that if companies don’t have to shove as much money into their pensions, those same companies don’t get as big a tax break (because money shoved into the pensions lowers their tax bill).  So this is both regulatory relief for pension-sponsoring companies as well as a (current) revenue-raiser for the federal government.

 It also included a small increase in the premiums that pension plans have to pay to the PBGC, the government agency which guarantees pension funds.  This may be a good thing – the more companies go bankrupt and turn their pensions over to the PBGC, the more the PBGC gets into trouble.

I don’t know that you should be “alarmed.”  There isn’t anything you can do about it one way or the other. 

What you can do:

Review how much you hope to get from your pension.  And make sure you have other savings in place, too.  If your pension is underfunded, and your employer goes under and the pension is turned over to the PBGC, you may get a much lower payout from the pension than you thought you were going to get.  Google for “PBGC maximum benefit” to get an idea of those limits.

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