Managing contribution volatility in a well-funded pension plan

After several years of healthy investment returns, some plan sponsors are finding that their pension plans have reached or are approaching a 100% funded status. While having a fully funded plan is a great place to be, it does come with its own challenge—namely, the risk of significant contribution volatility. Having a contribution that varies considerably and unpredictably from one year to the next is especially unappealing for public plans and municipal budgets.

This article explores the sources of contribution volatility and provides some approaches to managing it, specifically in the context of a well-funded plan.

Some public plans use a fixed contribution rate, so their contributions are only impacted by changes in the plan’s liabilities or investments to the extent they periodically adjust the contribution rate. This article focuses on plans that base their funding on an actuarially determined contribution (ADC), not a fixed contribution rate. It does provide plan sponsors of fixed contribution rate plans with some alternatives to consider if they wish to move to a more responsive funding model based on actuarially based funding concepts while minimizing contribution volatility.