What Happens When Funding Relief Is No Longer Relief

Many corporate pension plan sponsors have heard a similar story about an incredibly volatile 2022: “interest rates are way up, equity markets are way down, but overall, our pension plan’s funded status has improved.” But which funded status? The pension plan impact on the plan sponsor’s balance sheet may have improved, but the valuations that determine Minimum Required Contributions use a completely different measurement basis. As it turns out, the funding relief that has governed pension funding since 2012 may suddenly be doing more harm than good to contribution requirements, and many plan sponsors could be in for a rude awakening as early as next year.

A funding relief refresher

Pension liabilities for both corporate accounting and IRS minimum funding purposes are determined using long-duration, high-quality corporate bond yields. Where these two measures differ, however, is how they utilize these bond yields. While corporate accounting liabilities are generally mark-to-market and use a snapshot of a yield curve on a given measurement date, the IRS minimum funding liabilities are generally based on a long-term average of yields. Prior to the implementation of funding relief, the averaging period was 24 months, and this 24-month average is still used for certain purposes. Corporate bond yields dropped significantly in 2011 and 2012, largely remaining at those levels for the rest of the decade until they fell even further during 2019 and again at the onset of the COVID-19 pandemic in 2020. And since lower yields translate into higher pension liabilities, this trend has caused pension obligations to soar in the past decade.

*FTSE Pension Discount Curve Index

In 2012, Congress implemented funding relief to help mitigate the sharp decline in interest rates’ effect on pension contribution requirements. The relief required interest rates to stay close to their 25-year average. Since rates at the time were historically low and the 25-year average included rates from the late 80s and early 90s, which were in the 8% – 10% range, the interest rates used were significantly higher than market rates at the time, yielding lower liabilities and contribution requirements. Those circumstances held true until recently.

The current predicament

After a decade of mark-to-market pension discount rates hovering in the 2.5% – 4.5% range, 2022 has seen rapid and sustained increases in discount rates, primarily driven by high inflation, the Fed’s actions to combat it, and widening credit spreads due to economic uncertainty. For similar reasons, it’s also been a tumultuous year for capital markets, with the S&P 500 down approximately 20% year to date. While bonds are often seen as protection against equity losses, the sharp rise in yields has generated significant losses in the bond markets as well. Total portfolio losses for many plans are over 20%.

Even though asset portfolios have taken a beating this year, rising discount rates have generally made pension liability values on an accounting basis fall even further. This means most plans’ funded status based on current interest rates and asset values improved during 2022. The key word here is current – if you use an interest rate basis that is averaged, such as the one found in the IRS’ minimum funding rules, the picture changes dramatically. Those valuations will use an effective interest rate that is approximately 15-18 basis points (0.15-0.18%) lower than they used for 2022; there is no significant rise in rates on this measure due to the long-term averaging. This means IRS minimum funding liabilities will increase relative to 2022, even while asset values have seen significant decreases. As a result, most pension plans’ funded status on the IRS basis will drop significantly. How significantly will depend on each plan’s characteristics, asset allocation, and its “asset valuation method” for minimum funding requirements.

There are two asset valuation methods available:

  • Market Value of Assets (“MVA”) methods look at a snapshot of the plan’s assets on the valuation date. We expect plans using this method will see very large drops in funded status.
  • Actuarial Value of Assets (“AVA”) methods smooth gains and losses over a period of up to two years, so the effect will be somewhat muted, but still significant. Note: the IRS’ rules state that AVA can only exceed MVA by 10%, and most MVAs will have lost much more than 10% from the prior year.

The takeaway here is that even plans that were previously over 100% funded may now be below the critical 80% threshold, despite the plan having gained ground on a mark-to-market accounting basis! This could mean significant increases in required contributions and could trigger funded-status-based benefit restrictions, even for sponsors who have avoided either of these outcomes for the past several years. This doesn’t even contemplate other metrics that still rely on the prior 24-month averaged rates, such as PBGC Alternative method premium calculations and the PBGC 4010 filing threshold.

Can anything be done?

As we consultants love to say: it depends!

If you have cash available, you can always accept the higher contribution requirements, make discretionary contributions to avoid the consequences of a lower funded status (benefit restrictions, PBGC 4010 filing, PBGC premiums, etc.) and otherwise forget you read all of this. But this is not a realistic option for many plan sponsors.

Another option exists to mitigate the immediate impact of this rapid change in circumstances, but it comes with potential long-term and wide-ranging implications, so sponsors should carefully weigh the pros and cons before implementing it. IRS rules allow sponsors to use an alternative interest rate basis: the “full yield curve.” The full yield curve uses interest rates from the month prior to the valuation date without taking funding relief’s 25-year averaging into account. We don’t yet know what the December 2022 curve will look like, but based on where rates sit today, it could produce effective interest rates 50-80 basis points (0.50% – 0.80%) higher than the stabilized (funding relief) interest rates for 2023. This means liabilities could be 5% – 10% lower using the full yield curve (or “spot rates” as shown in the chart below), granting the plan additional funded status and reducing or fully eliminating contribution requirements.

Note: Spot rates for October 2022 and later are estimated based on market conditions through 10/31/2022

There is one major downside to adopting the full yield curve: once you adopt it, you cannot switch back to the funding relief basis without approval from the IRS. In general, full yield curve-based liabilities will be more volatile than those using an averaged interest rate basis. If rates come back down, the full yield curve could once again lead to higher liabilities than those under funding relief. However, for plans with most of their assets following a liability-driven investment (“LDI”) strategy, by design the value of your liabilities should generally change in similar ways as your asset values such that funded status volatility should remain muted.

Plan sponsors should carefully consider the short-term and long-term implications of a potential switch to the full yield curve and weigh those against the increase in required contributions and potential benefit restrictions for 2023. As a plan sponsor considering this change, you should ask yourself: how much do you value having lower contributions now vs. potentially higher or more volatile contributions later on? How much do you value predictability of contributions year-to-year? If you are using an LDI strategy, contribution requirements may actually be more predictable using the full yield curve and a MVA method. If adopted, the full yield curve is used for other purposes as well (PBGC premiums if using the Alternative method, maximum tax-deductible contribution, PBGC 4010 filing trigger) so this decision is not just about 2023 contribution requirements and benefit restrictions – you must consider and weigh all the consequences against one another.

Let’s take a look at some sample plans to see how this plays out.

Plan 1: 85% funded on a mark-to-market basis at 1/1/2022

The plan has most of its portfolio dedicated to a LDI strategy, has always used funding relief since inception, and has not had required contributions for many years with its IRS funded status, or “AFTAP”, staying above 100%.

We expect the 1/1/2023 AFTAP will be certified just at or below 80% using funding relief and a MVA method. Falling below 80% would not only trigger benefit restrictions, but also a PBGC 4010 filing, and there will of course be a Minimum Required Contribution for the 2023 Plan Year. The sponsor could make a cash contribution sufficient to reach 80% and avoid benefit restrictions, but recognizes that switching to the full yield curve would raise the AFTAP above 80%, avoiding benefit restrictions and the 4010 filing, and significantly reducing the 2023 plan year contribution requirements.

This sponsor’s decision to switch to the full yield curve is closely tied to their comfort with making annual contributions at 2023’s level in the future; they understand that keeping funding relief in place could potentially reduce future required contributions to $0 again should rates fall, but they prefer the predictability and near-term savings with the lower 2023 contribution.

Plan 2: 80% funded on a mark-to-market basis at 1/1/2022, has a “traditional” asset allocation (60% equities, 40% intermediate duration bonds), uses a 2-year AVA method, and pays lump sum benefits

When necessary, this sponsor has made contributions in the past to avoid benefit restrictions on paying lump sums. The plan has owed small Minimum Required Contributions recently, maintaining an AFTAP above 90%.

We expect the 1/1/2023 AFTAP to be in the high 70% range. It could be worse, but the AVA method’s gain/loss smoothing is helping mitigate the AFTAP decrease for this Plan Year. The sponsor could raise the AFTAP above the 80% restrictions threshold by switching to the full yield curve but is concerned about locking into a liability measure that could rise quickly if rates fall – especially since the AVA will be slower to reflect investment gains. In addition to the 2023 Minimum Required Contribution, the sponsor decides to make a discretionary contribution by September 2023 to keep the AFTAP at 80%, maintaining funding relief and not switching to the full yield curve in case interest rates come back down by 2024.

Plan 3: 100% funded on a mark-to-market basis at 1/1/2022 and uses LDI

The plan sponsor switched to the Alternative method for calculating its PBGC premiums for the 2020 Plan Year. The PBGC Variable Rate Premium (“VRP”) was $0 for 2021 and 2022, but is set to rise substantially for 2023. The sponsor would normally make contributions to avoid paying a VRP, but the contribution to enable that for 2023 is large and would put the plan in an over-funded position on a mark-to-market basis.

The sponsor decides to switch to the full yield curve for IRS minimum funding purposes, which is also used under the Alternative method with PBGC. This switch allows the PBGC funded status to reflect the plan’s “true” 100% funded status more closely, eliminating the 2023 VRP. Future contribution requirements are expected to be small and stable under the full yield curve, which will align well with their LDI strategy.


For the first time in over a decade of its existence, funding relief is poised to produce materially worse funded statuses than current market rates. Plan sponsors should be planning now for the potential increase in required contributions, or contributions necessary to avoid triggering benefit restrictions; such contributions could be required as early as September 2023 for calendar year plans. Options do exist to mitigate the impact to the 2023 Plan Year results, but those options have long-term and wide-ranging implications and should be considered very carefully. There is no one “right” answer for what to do – the best option will depend on the plan’s characteristics, funded status, investment strategy, and asset valuation methods, as well as the plan sponsor’s appetite for making cash contributions sooner rather than later. Taking action now to understand your unique situation and options will avoid last-minute surprises next year and lead to better outcomes.

Reach out to Agilis and we can help you understand the implications for you and your plan.


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