<nobr>Sep 8, 2005</nobr>

ERIC Submits Letter to Senators Urging Careful Consideration of Pending Pension Reform Legislation

Dear Senator:

Congress faces few challenges more difficult than crafting rules for defined benefit pension plans. Unstable, burdensome, or overreaching rules ensure that employers will find other ways to compensate their employees. On the other hand, employees need assurance that the benefits they have accrued will be available to them at retirement. The ERISA Industry Committee has long supported adequate funding rules as well as reasonable protections for employees’ benefits.

We commend the members of the Senate Health Education Labor and Pensions Committee for the careful attention they have given to pension issues before them in the midst of many pressing national matters. We strongly urge the Committee to take the following actions to protect the vitality and availability of defined benefit pension plans in the future.

Regarding single employer funding provisions:

* The proposed committee bill (FRA05416.LC) appears to provide that asset and liability calculations may be averaged over a period of up to three years. This is essential to providing employers with the ability to predict future contributions and thus to plan rationally for their business needs such as research and development, construction of plants and facilities, and maintaining jobs.

* The proposed bill also provides for ten year amortization of funding shortfalls, provides a gradual transition to new funding targets over the next ten years, starting in 2007, and includes the value of lump sums in liability calculations, thus providing for steady funding of obligations while allowing companies to step into the new rules over time.

* The proposed bill also does not impose an expanded liability on companies with below investment grade credit ratings, appropriately focusing instead on the funded status of the plan. Proposals to rely on credit ratings to determine pension obligations are misdirected and could undercut the future viability of the plan sponsor. This will harm, rather than protect, participants as well as the Pension Benefit Guaranty Corporation (PBGC).

* The proposed bill significantly increases contributions sponsors can make on a tax-deductible basis so that plans can fund up in good times to better weather downturns. It also preserves the use of credit balances that make pre-funding of future contributions economically feasible, although with some restrictions that require further analysis.

* The proposed bill imposes limits on increases in premiums to the PBGC and appropriately retains Congressional control of premium levels.

Funding reforms are by nature interlocked and complex. We are continuing to study the bill and will provide more detailed comments as soon as possible, but the Committee should strongly push the helpful overall approach it has taken to funding reform, as outlined above.

Regarding hybrid plan provisions:

* Approximately 9 million individuals participate in existing hybrid plans, according to the most recent Form 5500 data. Hybrid plans are highly valued by the vast majority of employees because they provide the security of defined benefit arrangements and are guaranteed by the PBGC while accommodating the needs of the modern workforce. Congress will determine how many such plans will be available in the future both by the actions it takes regarding litigation that, based on flawed arguments, challenges the basic design of these plans as well as by whether it adequately and reasonably addresses other issues and uncertainties regarding hybrid plans. Any legislation that fails to reduce litigation or the threat of litigation against hybrid plans or fails to ameliorate the uncertainties regarding such plans jeopardizes their future existence and, accordingly, the retirement security of millions of American workers. While additional study is required to determine the true impact of the proposed committee bill, the following comments can be made at this time:

* The proposed bill appropriately appears to validate cash balance and pension equity plan designs without regard to when the plan was established. This is essential for the continued availability of these plans to those millions of workers now participating in them.

* The proposed bill unfairly imposes new and retroactive requirements on employers who in good faith reliance on existing law have already converted their traditional defined benefit plans to hybrid plans, putting companies at new risk of litigation for actions that were legal at the time they were taken. Such requirements artificially create winners and losers without regard to the actual impact of a conversion on plan participants, each of which occurred in unique circumstances. The requirements create arbitrary and retroactive mandates that will destabilize settled law and will have a long-lasting, wide-spread chilling effect on the willingness of employers to sponsor any type of employee benefit plan.

* By including a litigation “carve-out,” the proposed bill unfairly distinguishes between plans that may be otherwise identical except that a suit has been filed against one and not the other. To the extent companies do not meet the bill’s “safe harbor” requirements, or did not meet them at the time of their conversion, the proposal can set off a rush to the courthouse that will further undermine employers’ ability to sponsor employee benefit plans on a rational and long-term basis

Thus, we believe that the approach taken in the amendment filed by Sen. Judd Gregg, which validates hybrid plan designs but does not impose specific requirements on prior conversions or carve out plans currently in litigation, will be far more successful in ensuring that present and future employees will have defined benefit pension plans offered to them and in ensuring that the PBGC maintains a strong premium base.

We would be pleased to respond to any questions you may have.

Sincerely,

Janice M. Gregory
Senior Vice President
jgregory@eric.org

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