When Moving Ahead for Progress in the 21st Century (MAP-21) was passed, the interest rate stabilization provisions provided much needed funding relief for defined benefit pension plan sponsors. However, taking full immediate advantage of the reduced minimum funding requirements may not be the best answer for all sponsors, for a couple reasons.

First, the stabilization provisions have a significant impact in the short term, but that impact diminishes in the long term. Under the scenario where current interest rates remain at or near historically low levels, minimum funding requirements are projected to ramp up every year. Pension funding rules provide some flexibility such that smoothing out contributions over, say, a five-year period could be an appealing option in order to reduce contribution volatility.

Second, Pension Benefit Guaranty Corporation (PBGC) premiums will increase dramatically over the next few years. Currently, the variable rate premium (one component of the premium) is equal to 0.9% of the pension plan's unfunded obligation. By 2015, that percentage will double to 1.8%. The same strategy of smoothing out contributions over a time period such as five years could translate into sizeable PBGC premium savings over that period. For example, the 2015 premium would be $18,000 lower for each $1,000,000 that the plan's assets are higher under the smoothing strategy versus the bare minimum strategy. The same is true for the remaining years in the smoothing period.

Defined benefit pension plan funding relief may be just what some companies need right now in an uncertain economy. But others should take this opportunity to project funding requirements over the next several years, and perhaps find a strategy that will both reduce volatility and result in real cash savings through lower PBGC premiums.