The changed dynamics of NPV analysis of pension plan funding
The most common funding policy for U.S. defined benefit pension plan sponsors has traditionally been to contribute the minimum required by the IRS. This is no longer the case. Many large sponsors are choosing to make discretionary contributions, a decision that – either explicitly or implicitly – is based on net present value (NPV) analysis. The primary factors that cause NPV analysis to favor discretionary contributions are Pension Benefit Guaranty Corporation (PBGC) premiums and tax considerations.
This paper explores why large sponsors are making discretionary contributions by describing the minimum contribution policy versus discretionary funding, PBGC premiums, and tax considerations.