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<nobr>Nov 17, 2005</nobr> ERIC Urges Senate to Consider Pension Reform Recommendations
In a letter to the Senate sent November 16, ERIC urged senators to consider its recommendations for pension reform. Not long afterward, S 1783 was approved by the Senate in a 97-2 vote. *************************** Dear Senator: The Senate soon may consider legislation (S.1783) that re-writes long-standing funding rules for defined benefit pension plans and includes provisions regarding hybrid pension plans and amending numerous rules regarding defined contribution retirement plans. The bill will have a dramatic impact on the ability of employers to sponsor retirement plans in the future and on the retirement security of tens of millions of workers. S.1783 addresses several problems that have resulted in plans being turned over to the Pension Benefit Guaranty Corporation (PBGC) at low funding levels, and many of the provisions regarding defined contribution plans will ease administration of those types of plans. S.1783 contains other provisions, however, that will be entirely counterproductive and make it difficult, and in some cases impossible, for employers to establish and maintain these vital plans for their employees. The Senate should ensure that a final bill adequately remedies the problems with S.1783, as outlined below. Funding rules must result in predictable, rational and stable funding over time. An employer must be able to anticipate required pension contributions several years into the future in order to plan its business investment and operations. Required contributions also cannot be too volatile; otherwise they will be too difficult to accommodate in cash flow operations of the business. S.1783 would compute required contributions using asset values averaged over only 12 months and liabilities calculated using an interest rate also averaged over only 12 months. This simply is too short a time to provide any meaningful predictability to the business – and it also will result in very volatile funding requirements. The bill approved by the Senate should follow instead the three-year averaging provisions that were included in the HELP Committee bill, which themselves substantially shorten the averaging periods allowed under present law. A plan’s liability must not be linked to the credit rating of the sponsoring employer. S.1783's proposal to impose a higher liability calculation on plans sponsored by an employer with a below investment grate credit rating is off point and dangerous. For a company that drops below investment grade, the proposals will impose sharp cash calls at precisely the wrong time – endangering both the plan and the company. The company’s credit rating does not determine whether the company’s pension plan is adequately funded and, in some instances, reflects the rating companies’ views of the industry rather than the soundness of a particular company. Moreover, the methods used by the credit companies to set their ratings are far from transparent and are under scrutiny in Congress and elsewhere in the government. Pension plans should not be held hostage to a measuring mechanism that is both unrelated to the plan and under scrutiny. If an “at risk” liability is to be imposed, it should be based solely on the funded status of the plan. The Senate should substitute the provisions of the HELP Committee bill, which imposes “at risk” liability on plans that are less than 60% funded, for those in S.1783. Increased funding requirements must be phased in gradually. Under current law, plans that are funded at a 90% or higher level are not required to make deficit reduction contributions in recognition of the facts that (1) plans funded at this level are well able to meet their benefit obligations and (2) some fluctuation in the funded status of plans is entirely normal. S.1783 sets a new, 100% funding standard. If companies are asked to meet this new standard too quickly, they will be faced in the near term with sharp, unrealistic, and – since these plans are solid and well funded – entirely unnecessary cash calls. Pension plans will be frozen and jobs lost due to an unsound national policy. S.1783's three-year phase-in is simply insufficient to avoid these unnecessary and harmful consequences. The Senate should replace this with a longer phase in period. Legislation should protect hybrid (cash balance & pension equity) pension plans. According to the most recent Form 5500 data, approximately 9 million individuals rely on hybrid pension plans for their retirement security. Until thrown into uncertainty by recent litigation, hybrid plans had been the favored option for employers who wanted to establish or maintain responsive and secure defined benefit pension that meets the needs of employees in a dynamic economy. It is important to understand that two very separate issues are involved in the current debate. One is whether the basic design of hybrid plans is lawful under age discrimination statutes. The other is concerns that have been raised regarding conversions from traditional plans to hybrid plan designs. If workers are to have secure pensions in the future, then plan sponsors must know that the basic design of hybrid plans fits within current law. This issue arises whether or not there has been a conversion, as it also would apply to a “start up” plan. Validation of the hybrid design is what is needed both now and for the future. S.1783 fails to tell 9 million workers that their plan is valid. Moreover, it imposes several new mandates that will steer companies away from hybrid plans and undermine employer confidence in offering other types of benefits as well. As such, it will not protect workers’ retirement security but will undermine it. Reasonable changes can address known problems. S.1783 protects the PBGC by shortening the amortization period for plan amendments, including lump sum utilization in liability calculations, modifying the guarantee for shut down benefits and for benefits in a company in bankruptcy, requiring the value of available credit balances to reflect the market value of underlying assets, prohibiting plan amendments if a plan is significantly underfunded, and limiting certain forms of benefit payments if a company is in bankruptcy. S.1783 also incorporates important safeguards that allow employers to put extra money in their plans during good times in order better to weather downturns such as the economy experienced a few years ago. Specifically, S.1783 provides that an employer can make larger contributions on a deductible basis than is the case under present law and also provides that money contributed in advance of the time a contribution is required can be used to offset that required contribution when it comes due. Both of these important provisions are essential to creating a framework that encourages soundly funded pension plans in the future. The ERISA Industry Committee (ERIC) has long supported rules that support sound funding of pension plans. Such rules both must ensure that plans are well funded over time and must accommodate the realities of operating a business. ERIC also has a vital interest in ensuring that hybrid defined benefit plans remain a viable option for employees in the future. ERIC has crafted comprehensive recommendations to address issues raised by recent events (see www.eric.org), including recommendations regarding pension funding, hybrid plans, and defined contribution plans. We would be pleased to discuss these issues with you in more depth. Thank you for your consideration of our views. If you have questions, please contact us. Sincerely, Janice M. Gregory Senior Vice President jgregory@eric.org |