Pension Reform – Wherefore Goest Thou?

 

by John H. Lowell, CCA Strategies LLC

 

We’ve been hearing about since this time last year. We need pension reform. We need it so that every American will be able to retire. We need it so that their pensions will be safe and secure, and so that their employers will not terminate their plans.

 

Whether you believe all the political rhetoric or not, pension reform is nearly upon us. It’s not a question of if, but of when, and of what is in it.

 

One thing that is sure to be in it is an increase in PBGC premiums. In late December, the House passed a budget bill in a largely party line vote. The following week, the Senate passed a similar bill (Vice President Cheney cast the tie-breaking vote), but the Senate bill contained four changes from the House bill. As is their right, the House Democratic leadership called for a roll call vote on the Senate version of the bill. Since the House had adjourned for the holidays, this was impossible. So, there we sit until at least January 31, when the House returns to session.

 

At this writing, we believe that the budget bill will pass fairly quickly once the House returns, so let’s look at what we expect to see in it.

 

Per-participant PBGC premiums are expected to increase from $19 to $30, with increases indexed to inflation. There will also be a three-year $1250 per participant premium for certain plans taken over by the PBGC, or having gone through a distress termination. PBGC discretion to raise premiums as it sees fit, however, does not look like it will be in a final bill.

 

With regard to other provisions, look for the existing House bill to carry most of the momentum. On December 15, in a surprising move, the Administration gave its support to the House bill, despite the fact that the original Administration proposal bore much close similarity to the original Senate proposal.

 

The House bill includes a provision allowing PBGC to enter into an agreement allowing a sponsor to disregard a credit balance in calculating its funding ratio, so long as, during the temporary waiver period, the credit balance is not used to offset contribution requirements. The new provision in the final bill would allow a PBGC-approved temporary waiver of a plan's credit balance. This allows companies the flexibility to stave off temporary funding hardship, without permanently losing the right to their credit balances.

The final bill will have some restrictions on plan amendments increasing benefits. However, unlike earlier versions of the House bill, the final one is likely to have two improvements. First, any plan that is at least 100% funded when not reducing assets by the credit balance will not be subject to restrictions, regardless of being less than 60% (would have to cease accruals) funded when reducing assets by any credit balance, or less than 80% funded (restriction on amendments). Second, the 100% noted above will be phased in by 2% per year, beginning at 92% in 2007. However, in the situation where the credit balance is not applied as part of this calculation, that credit balance must be permanently waived.

What else are we likely to see? Based on the Administration’s support of the House bill, look for 3-year smoothing of interest rates and asset values. Look for a modified yield curve approach to discount rates, and lump sum calculations. And, look for a 5-year phase-in of the 100% funding target.

Could the final bill be different? Of course it could, and it probably will. This is the US Congress we are talking about here, and surely, a last-minute trade-off here or there, will produce some provision which none of us had foreseen. But, for now, this is one person’s best guess. The Legal and Legislative Committee will do its best to keep you informed as the debate progresses.