The Power of the PENsion: Contributions – Pay Now or Later?
It may be a Prime Day to consider your pension plan contributions. You can pay now or later and there are benefits and risks to each decision.
Amazon’s annual Prime Day event ran for two days on July 11 and 12. Nothing raises consumer now-or-later decisions quite like it. For 2023, the number one item purchased during Prime Day was Temptations Cat Treats. (As reported by the consumer data analytics firm, Numerator.) This illustrates what most of us, and apparently many cat owners, know. We can defer purchases and payments, but doing so involves some risk. Inflation expectations might suggest that if a deal is available now, take it. Cash flow considerations might argue “wait.”
Plan sponsors have similar now-or-later decisions to make related to pension contributions and with each (now or later), there are benefits and risks.
The IRS requires underfunded plans to contribute a minimum amount each year to improve funded status. After the GFC in 2008 there have been various “relief” measures passed via omnibus legislature (MAP-21, various budget bills) which have lowered contribution requirements. This was intended to be temporary to help sponsors through the recession. Even though it has been extended several times, (and most recently through pandemic funding relief provisions in the 2021 American Rescue Plan Act) it only serves to postpone the inevitable. Eventually, contributions to the plan will be required. Accounting valuations are treated differently and have received no “relief.” Reducing contributions only causes a funding deficit to become worse from an accounting perspective—unless the valuation of liabilities changes. Indeed, the current rising interest rate environment has improved the funding of many plans, to the point where some sponsors are actively de-risking through lump sums and annuity purchase or termination.
We discussed this opportunity in November 2022. You can read that here. For companies that have been making contributions (as required) or de-risking (as the opportunity prompts), sponsor questions on contributions may pertain to optimizing employee benefits or impacts to organization cash flows. As the interest rate environment becomes more stable, and with provisions in previous legislation always subject to change and revision, it may be better to discuss a more suitable contribution policy now rather than later. Highland would be happy to consider these matters with you.
Please contact Mike Paolucci, mpaolucci@highlandusa.net or 312-833-5716.
Next month, we’ll explore the history of the pension plan.
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Highland Consulting Associates, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer of solicitation for the sale or purchase of specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
