“A little known rule change that allows companies to contribute fewer dollars to pension funds is signaling just how meaningless the retirement vehicle has become.
“This proves that pensions are pretty much dead,” said Greg McBride, chief economist at Bankrate.com. “The change is just another charade to mask the underfunding of pensions and increases the odds of having less money for retirement.”
“It’s not necessarily the immediate end of pensions but it’s not good for them and it’s certainly a bad sign,” McBride added.
The pension change was part of a transportation bill—called Moving Ahead for Progress in the 21st Century or MAP-21—passed by Congress last June. The change became mandatory this year.
In essence, MAP-21 lets employers put less money in their pension plans by allowing them to value their liabilities— what they have to pay out to pensioners—using a 25-year average of interest rates instead of current rates.
When interest rates are low, like now, pension plan liabilities are estimated to be higher and companies have to put in more money. When rates are higher, the liabilities are figured to be smaller and employers’ contributions are less. The 25-year average is expected to be at least 2-3 percentage points higher than rates today.
The reduced amount that companies will be putting in has to be figured out by each firm based on the higher rates. But Madison Pension Services, a consulting firm, has reported that some minimum pension contributions in 2012 were reduced by 33 percent.
Employers are not required to offer pension plans, but the government encourages them to do so by offering tax breaks….”