<nobr>Jul 17, 2006</nobr>

Pressure Builds for Pension Reform by August

Top negotiators in the House-Senate Conference on the pension reform bill (H.R.2830) met Wednesday, July 12, but hit a new snag according to Hill sources. A meeting scheduled for Thursday was cancelled. Nevertheless, while no “deadline” has been set, it is clear that conference leaders intend to have a bill finished before the August recess.

According to information provided to ERIC, discussions last week centered on transition rules to the new 100 percent funding target that appears in both bills. Some conferees apparently believed that an agreement had been reached to institute a structure similar to that in the final House bill that provided that (1) a plan would face no new amortization schedule so long as it met each of the phase-in funding targets (2 percent step-ups in each of five years) including any credit balance, but (2) any other plan must subtract any available credit balance to determine its funded status and would face an immediate 100 percent funding target. Amortization payments triggered by this formula would continue until the plan was 100 percent funded without the credit balance. The Senate bill did not have the “full funding override” provision but did provide a three-year step-up to the 100 percent target that included the value of credit balances. Other conferees apparently believed that an agreement had been reached to provide both a full-funding override and a phase-in to the new 100 percent target.

Other major differences remain to be settled including hybrid plan issues and issues arising from the tax bill that will be attached to the pension conference agreement. Regarding hybrid plans, the two bills take radically different approaches with the House bill providing general guidance regarding the application of age discrimination rules to defined benefit plans and abstaining from imposing new rules on conversions. The Senate bill, by contrast, provides design specific requirements on cash balance plans in order for those plans to qualify under age discrimination statutes and imposes specific requirements on plan conversions. Neither bill provides design clarification for existing plans, and a final bill is not expected to include such a provision. Companies that already sponsor hybrid plans will have to assess the impact of a final bill on their situation.

The following is a compilation of other tentative agreements regarding pension funding among the conference leaders as understood by ERIC. Please note that this information is based on conversations with different Hill sources at different times and may have changed or may have been incorrect when provided.

• A 100 percent funding target beginning in 2008 (see above for transition notes);
  Two-year averaging of interest rates and two-year smoothing of assets;
• Amortization of both gains and losses;
• Ability to “burn” credit balances at any time;
• No use of a company's credit rating to determine “at risk” status;
• “At risk” status applied under a “70-80” formula; (Specifically, a plan would be “at risk” if, after subtracting credit balances, it was funded less than 80 percent based on on-going liability AND less than 70 percent based on “at risk” liability. The 80 percent target may be phased in over four years, i.e., 65 percent, 70 percent, 75 percent, and 80 percent.)
• “At risk” would be defined as each employee retiring at their most expensive point in time with the most expensive benefit available (a situation that would never occur in reality). It is unclear whether this would be limited to employees eligible to retire within a certain period and whether “load factors” such as those in the House bill would be added.
• Some increase in the limits on deductible contributions—although we believe that this has been cut back compared to either the Senate or the House bills.

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