Has
Washington
dropped the ball on ERISA reform? Some leading critics
think so
» More Debates
» Temporary Measures
» Out of Employees' Pockets?
» "Serious" Reform
Call it Enron IIthe second time in two years that
pensions have been at or near the top of Washington's
agenda. Lawmakers and regulators have spent the session
deliberating on a flock of new pension-related proposals.
"I'm pleased that pension issues rate higher on the scale,"
says David Certner, federal affairs director at the AARP.
"The disclosures about Enron, the economic downturn, the
problems with cash-balance plan conversions have all helped
create a great deal more sensitivity on pension issues in
Congress and the electorate. They used to slide under the
radar a lot more easily."
However, a number of pension experts and policy players
fear that the chance for broad reform of ERISAand perhaps
creation of a brighter future for defined benefit plansis
being dissipated.
Some blame the Bush administration, which they say spent
the past two years dithering over how to solve the serious
problem of how to replace the 30-year Treasury used to
calculate employers' pension contributions, only to emerge
with an inadequate and unworkable solution. That has left
Congress scrambling to take action on the discount rate
issue at a time when many pension plans are in crisis
rather than deliberating carefully on what is best for
ERISA plans in the long run.
"I understand it's only in the last couple of weeks that
Treasury's begun to study how to construct an alternative
to the current discount rate structure," says Mark Ugoretz,
president of the ERISA Industry Committee, after House
committee hearings in mid-July. "They've had since 2001 to
deal with this issue and they just let it slide."
"The funding rules in general need to be rethought,"
says Norman Stein, Douglas Arant Professor of Law at the
University of Alabama School of Law. "It doesn't make a lot
of sense to me to lift out the interest rates used for
certain funding purposes and say we have to correct those,
without looking at the entire scheme."
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More Debates
Congress and pension regulators are simultaneously
debating a slew of other pension-related issues. However,
the seeming emergency over the discount rate structure
threatens to allow some contentious measures either to slip
through without enough debate or to die an obscure death,
further limiting the possibility for broad pension reform.
Among them:
The proposed Pension Preservation and Savings Expansion
Act, currently the House vehicle for a discount rate
change, also would change the benchmark for figuring
lump-sum payouts from defined benefit plans. Supporters say
the shift to a corporate bond composite rate would
eliminate a windfall to departing workers; opponents say it
unfairly would force some workers to foot part of the bill
for bailing out troubled plans.
Another provision in the bill, sponsored by
Representatives Rob Portman (R-Ohio) and Bill Cardin
(D-Maryland), would allow companies to apply a new
mortality table to their pension contributions that
projects shorter life spans for blue-collar workers. The
probable result: lower pension contributions for plans in
rust-belt industries. However, critics are asking why the
bill does not incorporate calculations that show
white-collar workers live longer.
The post-Enron push for greater disclosure of
information about defined benefit plans' financial
condition seems to be running out of steam. The pension
proposals introduced by the Treasury Department in July
that included requiring plan sponsors to assess and publish
the termination value of their plans each year met with
little support.
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Temporary Measures
The issues raised by these recent developments provide
plenty of fuel for a full-fledged rethinking of ERISA
itself. Nevertheless, Congress' main concern at
presentincluding a series of late session hearings by the
US Senate Subcommittee on Financial Management, the Budget
and International Securityis the need to replace the
30-year Treasury as the benchmark for calculating pension
contributions.
"A temporary solution may be necessary here," says
Certner, "but to make long-term policy in that environment
may be the wrong thing to do." Instead, he says, "We should
spend a couple of years and see if there are some long-term
changes in the economy and we get a better view of what
problems we have to address."
"We're very concerned about making a significant change
to the funding rules that would impact the system as a
whole and individual companies' willingness to sponsor
plans. That concern relates to the yield-curve approach,"
says Sean O'Brien, legislative field director at the
AFL-CIO.
Finding agreement on what the permanent replacement
should be will be difficult, however. Ugoretz would like to
see the corporate bond composite made permanent. The
Economic Policy Institute is proposing a new benchmark
composed of a 20-year average of 10-year Treasury bonds,
which it argues would better reflect the purpose of a
pension fund. Stein, too, would like to see the government
stick with some combination of Treasurys, because Treasurys
are essentially riskless securitiesand a stream of
guaranteed pension payments is not supposed to reflect the
value of a corporate securities portfolio.
However, Stein is reluctant to see a definitive decision
made at a time of unusual difficulty for many pension
sponsors. Instead, he suggests perhaps temporarily dropping
the required funding level to 90% or 80%, installing a more
liberal contribution waivers policy, and appointing a
"base-closing commission" to develop a long-term solution
for Congress.
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Out of Employees' Pockets?
More disagreement can be expected on the issue of
altering the discount rate for valuing lump-sum pension
payouts. Holding the lump-sum discount rate in sync with
the overall pension funding standard has wide support.
ERIC, the American Benefits Council, and even some unions
are pushing for it. Ron Gebhardtsbauer, senior pension
fellow at the American Academy of Actuaries, suggests
employees who take a lump-sum payout are currently getting
a subsidy and that, with the change, they still would
receive a good benefit.
However, not everyone agrees. "We're willing to support
some funding relief, but we disagree that it should come
out of the employees' pockets if they choose a lump sum,"
says Certner. The difference can be substantial. For a
45-year-old, a move to a discount rate that is 1% above the
30-year Treasury rate can make a difference of 25% in
benefits, Certner says.
Portman-Cardin also has heated up a new discussion by
giving plan sponsors leeway to use the new mortality tables
with their lower life-expectancy estimates for blue-collar
workers. Stein also questions whether worker demographics
are the best measure of a company's ability to pay promised
pensionsthe same issue which has brought so many disparate
players to consensus about the need to replace the 30-year
Treasury. "Shouldn't the creditworthiness of the company be
of concern?" he asks.
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"Serious" Reform
"Whatever it is, it isn't going to be a permanent fix
anyway," says Stein. "People will be coming back a couple
of years from now, asking for the corporate bond rate plus
2%, or a junk bond rate instead of top-rated bonds. We're
making policy based on a very unusual point in time."
Others fear that a temporary solution, plus the
individual breaks that some industries are clamoring for,
could make it more difficult to make good overall pension
policy a few years from now. "I think we should rewrite the
rules in a serious manner, not for specific industries,"
says Weller.
At stake may be the prospect of rebuilding defined
benefit plans' viability at a time when workers find them
increasingly important. "Our real concern about the defined
benefit system, and our concern about a proposal like the
administration's, is that changing one piece in a major
way, without changing pension funding in a much broader
way, will lead to companies getting out," says the
AFL-CIO's O'Brien.
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