For the sponsor of a defined benefit pension plan, minimizing funding status volatility is the key to managing contribution levels.  If a plan sponsor allows the funding level of a plan to deteriorate significantly, the probability of being required to make a large contribution in the future is greatly increased.  

The sponsor of a defined benefit pension plan bears the risk that plan assets will decrease in value. Adverse experience of the population of employees in the plan also can lead to increased contributions, but the impact is generally minor.  Consistently meeting required contributions and minimizing asset risk may increase the long-term expected cost of the plan, but the likelihood of the plan sponsor facing a large required contribution will be diminished.  Hence many plan sponsors have chosen an asset allocation based on liability-driven investing, a framework in which a portfolio is created to yield cash flows to match liabilities.  

If you have questions about how to manage the contributions to your pension plan, please contact a Nyhart pension professional.

This article was last updated on January 3, 2012