defined benefit plan funding reform & PBGC Premium increase Proposed

[papau]

Department of Labor Secretary (and PBGC Board Chairman) Elaine Chao has announceed the Administration's defined benefit plan funding reform proposals. The proposals cover three main areas:

A. Reforming the funding rules for defined benefit plans to ensure that employers fully fund their retirement promises.

This will include using a single approach to measure pension fund liabilities, which will be based on the "yield curve" approach that the Administration put forth during the last Congress as well. The proposal also reduces to seven years the time period within which underfunded plans must make up any shortfall in funding. It will also allow solvent companies to make more generous contributions during good economic times (increasing the allowable tax-deductible contribution level from 100% of liabilities to 130%). Finally, the proposal will prohibit underfunded plans from promising additional benefits to workers.


B. Reforming the premiums that defined benefit plans pay to the PBGC.

The flat rate premium will increase from $19 to $30 per participant. The variable rate premium will also increase, depending on the funded status of the plan.


C. Increasing the disclosure of information about the plan's funding status to participants, investors, and regulators.

This will also include making publicly available certain information filed with the PBGC by underfunded plans.

House Education and the Workforce Chairman John Boehner (R-OH) has made it clear that defined benefit plan funding reform is the Committee's top legislative priority this year, with legislation to be released within the next few months.

The business community is unlikely to embrace the Administration's reform proposals. In particular, employers are strongly opposed to the "yield curve" approach and have been arguing strenuously for making the temporary composite corporate bond rate liability measure permanent. That temporary interest rate fix for determining pension liabilities will expire at the end of this year. Due to that fact, all parties (the Administration, Congress and the business community) recognize the urgency of enacting permanent db funding rule changes.



http://www.dol.gov/opa/media/press/opa/OPA20050041.htm

OPA News Release: <01/10/2005>
Contact Name: Eryn Witcher
Phone Number: 202-693-4676
Release Number: 05-0041-NAT

Bush Administration Proposal to Strengthen the Retirement Security Of 34 Million Workers Announced by Secretary of Labor
Reforms Protect Workers and Retirees Enrolled in Private, Defined Benefit Pension Plans

WASHINGTON—Elaine L. Chao, U.S. Secretary of Labor and Chairman of the Board of the Pension Benefit Guaranty Corp.(PBGC), today announced the Bush Administration's plan to strengthen the retirement security of the 34 million workers and retirees covered by private, single employer defined benefit pension plans.

“As Chairman of the Board of Directors of the Pension Benefit Guaranty Corporation, I have become increasingly concerned as the number of terminated plans grows and the PBGC is forced to assume ever larger liabilities,” said U.S. Secretary of Labor Elaine L. Chao. “If nothing is done, the financial integrity of the federal insurance system will be compromised and the pension security of 34 million workers and retirees will be more at risk.”

The Administration's plan will ensure the long term solvency of the PBGC and protect the workers and retirees covered by private, single employer defined benefit plans. It is based on three main principles:

Reforming the funding rules for private defined benefit pension plans to ensure that employers fully fund their retirement promises.
Reforming the premiums that private defined benefit plans pay to the federal insurance program to better reflect the real risks and costs.
Increasing the disclosure of information about private defined benefit pension plans to workers, investors and regulators to ensure greater transparency and accountability.
The key elements of the Administration's plan include:

A single, accurate way to measure pension fund liabilities, replacing an existing system that is overly complex, confusing and ineffective.
Funding targets that reflect a plan's real risk of termination.
Reasonable time periods for plans to reach funding targets.
Flexibility for solvent companies to make more generous contributions to pension plans during good economic times.
Restrictions on the ability of financially strapped companies to promise more benefits than they can pay for.
Measures to ensure the long-term solvency of the PBGC.
The Bush Administration’s Plan for Strengthening Retirement Security

This Administration believes that promises made to workers and retirees must be kept. The retirement security of the 34 million Americans participating in single employer defined benefit pension plans depends on employers keeping the pension promises they make.

However, the current system does not ensure that pension plans are adequately funded. When underfunded plans terminate, workers' retirement security is threatened. Underfunded plan terminations are placing an increasing strain on the pension insurance system and impose an increasing burden on employers who sponsor healthy pension plans.

The Pension Benefit Guaranty Corporation (PBGC) recently reported a record deficit of more than $23 billion. Although the PBGC will be able to pay benefits for some years to come, large and rising deficits undermine the long run financial solvency of the pension insurance system. Underfunding in the pension system must be corrected to protect worker benefits and to ensure taxpayers don't risk paying for broken promises.

To protect workers and retirees receiving PBGC guaranteed benefits, to improve the financial status of the PBGC, and to encourage continued participation in the voluntary pension system by healthy plans, the Administration's proposal focuses on three areas:

Reforming the funding rules to ensure pension promises are kept by improving incentives for funding plans adequately
Improving disclosure to workers, investors and regulators about pension plan status
Adjusting premiums to better reflect a plan's risk and ensure the pension insurance system's financial solvency
REFORMING FUNDING RULES

Current law provides for a Byzantine and ineffectual system of funding requirements that has allowed the nation's pension plans to become underfunded by an estimated $450 billion. The Administration's plan will bring simplicity, accuracy, stability, and flexibility to the funding rules, encouraging employers to fully fund their plans and ensuring that benefit promises are kept.

Simplicity:
Replaces multiple measures of pension liabilities with one measure, adjusted to reflect risk of termination
Replaces multiple approaches to minimum required and maximum allowable contributions with one basic method
Accuracy:
Bases plan funding targets on the pension plan sponsor's financial health
Measures pension liabilities accurately using a current duration-matched yield curve of corporate bond rates
Stability:
Requires plans to make up funding shortfalls within a reasonable period of time, e.g., seven years.
Requires employers to forego promising additional benefits, or pay for them immediately, if the company is financially weak or the pension plan is significantly underfunded
Flexibility:
Allows plan sponsors to make additional deductible contributions during good economic times
IMPROVING DISCLOSURE TO WORKERS, INVESTORS, AND REGULATORS

In order to make informed decisions about their retirements and to plan for the future, workers need to know how secure their pensions are. Similarly, investors and regulators need timely information about the status of pension plans to evaluate plan sponsors' financial obligations and to ensure compliance with the law. The Administration's plan will:

Improve disclosure of plan funding status and funding trends
Make publicly available certain information filed with the PBGC by underfunded plans
Provide for more timely reporting and limits on filing extensions of plan annual reports
REFORMING PENSION INSURANCE PREMIUM STRUCTURE

The current premium structure does not reflect the true risk of a plan terminating with insufficient assets to pay benefits and can be manipulated to avoid payment of risk-based premiums. The Administration's plan will reform the premium structure to reflect more accurately the cost of the program and to shift the emphasis to risk-based premium funding.

Flat rate premiums
Adjusts the rate to reflect the growth in worker wages since 1991, when the current $19 rate was set, resulting in an index-adjusted rate of $30.
Indexes the premium to reflect the growth of worker wages since 1991, and into the future.
Risk-based Premiums
Premium determined based on plan underfunding relative to the appropriate funding target
The PBGC's Board will adjust the risk-based premium rate periodically so that premium revenue is sufficient to cover expected losses and to improve the PBGC's financial condition.
All underfunded plans will pay risk-based premiums.
# # #