The Highway and Transportation Funding Act has been passed by Congress and is expected to be signed by the President. In addition to funding the highway trust fund through May 2015, the act provides pension funding stabilization. It delays the widening of the interest rate corridors under MAP-21 until 2018. The narrower corridors will cause an increase in the interest rates used for many defined benefit pension plan measurements. The effect of such higher interest rates will likely be required to be communicated to plan participants (as part of the annual funding notice) by many plans.

The act will result in substantial reductions in minimum required contributions for 2013 – 2017 plan years for many plan sponsors and may help some plan sponsors avoid benefit restrictions during that time. As the interest rate corridors begin to widen in 2018, required contributions are expected to increase depending on trends in actual corporate bond yields, asset returns and other factors.

Since the act would change amounts retroactively to 2013, plan sponsors are permitted to elect not to have the act apply to 2013 in order to avoid revising information already finalized and acted upon. We hope that guidance will be forthcoming shortly on such an election, as well as other related choices that might be available to plan sponsors with respect to actions taken prior to passage of the act.

Next Steps

Plan sponsors will want to quantify the effect of these changes and consider which of the various options, once known, to exercise in the near term. These changes may also provide longer-term planning opportunities. For example, companies that are considering implementing de-risking strategies will want to understand how those strategies are affected by the new law.

Please contact your local Towers Watson consultant to discuss this topic further.