Magnetek, Inc. (“Magnetek” or “the Company”, NASDAQ: MAG) today provided updated pension funding guidance based on recently passed pension funding legislation.
Pension Funding Relief Legislation
On June 29, 2012, the United States Congress passed highway reauthorization legislation known as the Moving Ahead for Progress in the 21
Century Act (“MAP-21”), which among other things, provides defined benefit pension plan sponsors with funding relief. MAP-21, signed into law on July 6, 2012, includes provisions regarding interest rate stabilization for pension plans as well as amendments regarding additional required pension disclosures and an increase in future Pension Benefit Guarantee Corporation (“PBGC”) premiums. As previously disclosed, Magnetek has an underfunded defined benefit pension plan that was frozen in 2003.
The MAP-21 legislation revises the rules for determining the interest rates used to compute a pension plan’s funding target liability. The current method uses a two-year average of high quality corporate bond rates in determining pension liabilities. The new legislation allows plan sponsors to use a 25-year average corporate bond rate, with a 10% corridor, if the rate determined under the current rules falls outside the range of the 25-year average as adjusted for the corridor. The corridor will grow 5% per year, reducing the amount of relief available to plan sponsors each year. The provisions are generally effective for plan years beginning on or after January 1, 2012.
Impact on Magnetek’s Pension Funding Obligation
The Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) will begin work on regulatory guidance to allow plan sponsors, including Magnetek, to implement the funding stabilization provisions of MAP-21. Until the 2012 corridor rates are published, contributions due for the 2012 pension plan year are expected to continue to be made assuming no relief is provided. As a result, Magnetek is not anticipating significant changes to its previously disclosed funding amounts of approximately $12 million for calendar year 2012. However, preliminary estimates of required minimum pension contributions, taking into account the impact of the funding relief, for calendar years 2013 and 2014 are expected to decline by an aggregate amount of approximately $9 million from the previously disclosed amount of $52 million per the Company’s Transition Report on Form 10-K for the six-month period ended January 1, 2012. The actual impact on future effective interest rates, plan liabilities, and minimum contributions will also depend on underlying yields on high quality corporate bonds in the coming years. PBGC premiums for 2013 and 2014, paid out of plan assets, are expected to increase approximately $300 thousand annually.