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PBGC Reform: An Indicator for Pension Initiatives?

With an April 15^th deadline looming, followers of retirement policy watch and wait to see how the PBGC reform debate plays out and what it may foretell for other retirement issues. A shorter legislative session, a Presidential election cycle and a rising federal deficit do not bode well for retirement issues. Layer on top of that, the increasingly partisan nature of recent debates and it is easy to see why most believe little will be done this year. This article briefly highlights the pension issues that will most likely fall under the microscope of Federal legislators and regulators.

PBGC Reform

Despite some cynisim, there are few issues that look as promising for enactment as PBGC reform. The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of all American workers who participate in a defined benefit pension plan by providing a safety net that guarantees that pensions will be paid if the pension plan cannot meet its promises. The safety net or guarantee is funded by premium payments made by all companies who have a defined benefit plan.

PBGC reform enjoys bipartisan support as evidenced by a recent 89 to 6 passage in the Senate and passage twice by the U.S. House of Representatives. It recently passed a major hurdle with the appointment of Senate conferees, which permits the House and Senate to work to reconcile their differences in The Pension Stability Act (H.R.3108).

H.R.3108 replaces the now extinct 30-year Treasury bond rate used in defined benefit pension plan funding with a higher, corporate bond rate. However, the move to conference may also cause the Administration to make good on its veto threat.

PBGC reform contains modifications to the deficit reduction contribution (DRC). The proposed modification lets companies, who were not subject to the DRC in 2000, reduce their contributions to 80 percent of the DRC in 2004 and 60 percent in 2005. The reduced DRC is designed to assist cyclical companies such as the airline and steel companies weather these particularly tough economic times.

A letter from PBGC's Board of Directors: Labor's Elaine Chao, Treasury's John Snow and Commerce's Donald Evans threatens the use of an Administration veto saying, "Specifically, it would be irresponsible to amend the interest rate bill with any additional provisions that would significantly exacerbate systemic pension plan underfunding." PBGC estimates that the change to the corporate bond rate would reduce pension contributions by $80 billion and the change to the DRC would cause another $16 billion reduction.

The Administration wants the DRC to be considered as part of comprehensive pension reform. "Abandoning the DRC without an effective substitute would put workers, other companies and taxpayers at risk," explained Steven A. Kandarian, PBGC's outgoing Executive Director.

Even with a net loss of $7.6 billion and $11.2 billion deficit for single employer pension plans in 2003, Kandarian warns, "PBGC is not in crisis, the financial integrity of the program is at risk," and he calls on Congress, "to strengthen pension funding rules before our problem becomes a crisis."

In a March 11 letter, six Republican Senators echoed the Administration's sentiments and urged conferees to drop provisions that tinkered with the DRC. The six: Senators Peter Fitzgerald (R-IL), John McCain (R-AZ), John Kyl (R-AZ), Don Nickles (R-OK), John Ensign (R-NV), James Inhofe (R-OK), and Craig Thomas (R-WY) explained that, "Replacing the 30-year Treasury rate with a rate based on long-term corporate bonds alone would provide $40 billion of relief per year for the next two years-cutting required contributions by nearly one-fourth, and thereby providing tremendous relief to companies…"

For PBGC reform watchers, will it happen? Will it emerge with the DRC provisions? Will the Administration exercise its veto threat if the DRC provisions remain? All of these questions remain to be answered in an election year cycle in less than a month before companies with defined benefit plans are required to issue premium checks to PBGC.

COLI May Move Finance Bill

Senate Finance Committee Chairman Charles Grassley (R-IA) has expressed optimism that corporate owned life insurance (COLI) provisions in a broad-ranging pension bill may propel its passage by the Senate. As Senator Grassley explains, "I think the COLI legislation could drive the (passage) because the insurance industry has kind of been slowed up by the discussion of COLI."

The Senate Finance Committee revised provisions to require that income exclusion for COLI benefits would be contingent upon either obtaining the consent of the insured employee, the insured employee being either an employee within the past year or a key employee, and that benefits are payable to the family, beneficiary or estate of the employee.

The remainder of the bill addresses ENRON bankruptcy problems, such as ensuring that 401(k) participants have the right to diversify company stock holdings and receive more detailed account statements.

What About Advice?

Speaking of the ENRON bankruptcy, what has happened to the Congressman John Boehner's advice legislation? The bill, H.R.1000, was passed by the House, has the Administration's support, and is poised for Senate action. A companion bill, S.1698 was introduced in the Senate by Senator Michael Enzi (R-WY). However, the return of a healthy stock market coupled with concerns about mutual funds may have taken some of the urgency out of this legislation.

Administration Modifies Savings Proposals

The Administration's modified versions of its Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) and Employer Retirement Savings Accounts (ERSAs) in this year's budget submission are receiving mixed reviews. While groups such as the Investment Company Institute and American Shareholders Association are supporting the legislation, Congressional pension leaders have been more modest to even negative in their assessments.

Congressman Earl Pomeroy (D-ND) called the President's lifetime savings account proposal, "bad policy, plain and simple." He explains, "LSAs provide tax shelters for the most affluent in this country at the expense of doing nothing to help low and moderate income Americans save. In a nutshell, this proposal is costly and worsens a problem it is supposed to solve."

"I strongly support creating more incentives for long-term savings, especially in helping people save for retirement," says Congressman Rob Portman (R-OH). "The proposal for new RSAs could help address the impending crisis in retirement savings as baby boomers begin to leave the workforce. However, there's a huge difference between Roth IRAs and LSAs…while LSAs promote short term savings, I believe there is a greater need to promote long-term savings."

Congressman David Camp (R-MI) goes so far to say, "The Administration's proposal will erode employer-sponsored plans."

The Administration's proposal limits after tax contributions to LSAs and RSAs to $5,000 compared to $7,500 last year. Additionally, the proposals permit rollovers of 529 educational plans and Coverdell savings plans to LSAs, and Roth and other types of IRAs to RSAs, respectively until January 1, 2006.

Employer Retirement Savings Accounts (ERSAs) consolidates defined contribution plans and employer-sponsored IRAs into a simplified 401(k) plan that permit deferrals up to $13,000.

Cash Balance Plans Resurface as Part of Defined Benefit System Reform

On February 2, the Administration released a cash balance plan proposal that aimed to address concerns over employer conversions from defined benefit plans to cash balance plans. The Administration proposal attempts to eliminate provisions that have been viewed as discriminatory towards longer-term or older employees.

The Administration's proposal would impose a five-year hold harmless period after a conversion to a cash balance plan, where an individual's benefits under a cash balance plan must be equal to or greater to those he or she would have earned under the defined benefit plan. Additionally, the proposal bans "wear away" of retirement benefits so that all workers can benefit immediately after the plan conversion by ensuring that everyone earns benefits after the conversion.

Reaction to the Administration's cash balance proposal is mixed. House Education and Workforce Chairman John A. Boehner (R-OH) said "Our committee will look at reforms to strengthen cash balance plan protections for all workers, and most specifically older workers, as we move forward in crafting comprehensive proposals to reform and to strengthen the defined benefit pension system. We must work to ensure that all employer conversions to cash balance plans are fair and equitable to younger and older workers alike."

However, Congressman George Miller (D-CA), the Ranking Democrat on the Committee on Education and the Workforce cautioned, "The pension proposal contains no protections for workers in companies that have already converted to cash balance pension plans. In fact, it may permit employers to play games by using dubious interest rate assumptions in their new plans."

"Most importantly," says Miller, "The proposal provides no guarantee that all employees who would be harmed by a conversion to a cash balance plan would have the right to stay in the company's traditional pension plan until they retire."

Because of court decisions this past summer that said employers violated federal laws in adopting cash balance plans (Cooper vs. IBM Pension Plan and Berger vs. Xerox Corp. Retirement Income Guarantee Plan), employers may lobby Congress hard for guidance rather than wait for the Courts to provide guidance through the judicial process.

SEC Ropes in Defined Contribution Plan in Regulatory Push

The mutual fund scandals that erupted in 2003 may have the most immediate impact on defined contribution plans due to the Securities and Exchange (SEC) quick and no exceptions response. The SEC has quickly stepped in to address the sundry causes of those scandals matching New York Attorney General Eliot Spitzer's frantic pace.

Most recently, the SEC has proposed regulations that would impose a hard cutoff of 4 p.m. for mutual fund purchases or redemptions to eliminate market timing and late trading. Despite comments from 401(k) sponsors and their advocates that the hard cut off rule will disadvantage the majority of mutual fund shareholders who own shares through their defined contribution plan, the SEC has not made an exception.

The 401(k) community sought an exception to the 4:00 p.m. rule that would permit a retirement plan to submit orders to a designated transfer agent after the deadline if the plan's administrator had adopted adequate precautions to protect against late trading. In fact, the Mutual Funds Integrity and Fee Transparency Act (H.R.2420), which passed the House in an overwhelming 418 to 2 vote in November of 2003, included such an exception for retirement plans.

Defined contribution plans could also feel the impact of SEC actions on a broad array of issues ranging from disclosure of mutual fund fees to the imposition of a mandatory two percent redemption fee for mutual fund investments held less than five days.

For illustration, Senators Peter Fitzgerald (R-IL), Susan Collins (R-ME) and Carl Levin (D-MI) have introduced the Mutual Fund Reform Act of 2004, which would require the majority of directors who serve on mutual fund boards to be independent, provide transparency and disclosure of fees, and repeal 12b-1 fees, and even prohibit the use of soft dollars. Like this legislation, regulators and Congress are attempting to address not only potentially abusive practices but also to significantly overhaul the 65 year-old Investment Company Act. Congress will need to determine if legislative action is needed given the SEC's swiftness and comprehensiveness in addressing these issues.

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