Establishing a Funding Policy
Funding a defined benefit plan to reduce volatility.
A non-profit organization sponsors a multiple employer defined benefit plan benefiting about 1,700 participants established in the 1950s. The plan was completely frozen in 2003 to new entrants and additional accruals to existing participants. Over 30 separate employers contribute to the Plan on a prorated basis to meet funding requirements. With the severe economic downturn in 2008 that created asset losses and higher liability obligations, the organizations experienced a significant increase in funding and needed to understand how to reduce the volatility and required funding, yet continue to properly fund the plan.
Findley Davies worked with the Pension Committee to establish a funding policy. The analysis began with projecting the Plan's liability, assets, and minimum required funding over a 15-year period for multiple scenarios, including different asset returns and discount rates on the liability calculations. The analysis was conducted on an interactive basis requiring a significant time requirement and dedication to evaluate the impact of multiple assumptions in order to establish a safe, sound, and flexible funding policy.
Based on the results of the analysis, the Committee then established a threshold for and affordable contribution level. Findley Davies projected the plan minimum required contributions based on contributing the threshold annually to determine if the threshold amount was sufficient to fund the projected minimum contribution requirement. Based on the projections, the Committee was able to strategically establish a formal funding policy requiring a minimum contribution level each year until 2017 when the plan is projected to be fully funded. This will assist each of the 30 separate employers to budget their annual costs.
Each year, Findley Davies reviews the projections to determine if the threshold funding level is sustainable and continues to work toward fully funding the plan by 2017, as outlined in the objectives of the funding policy. The funding policy is able to be amended when the threshold is no longer sustainable, understanding that this will result in extending the horizon to a fully funded plan.
By facilitating focused discussions to derive the objectives of the Plan and the funding capabilities of the employers, Findley Davies assisted the organization to strategically develop a level annual funding amount to reduce volatility, set expectations regarding full funding, and enable employers to properly manage their annual costs related to the pension plan. Setting a funding policy should be used in coordination with plan design or structure changes and in tandem with investment decisions.