Compliance

Pension Bill (Still) Contains Some Welcome Relief, Controversy

July 21, 2003 (PLANSPONSOR.com) - The late introduction of a substitute amendment for pension reform touched off a firestorm in the House Friday - but what was in the bill?

By Nevin E. Adams | July 21, 2003
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>For one thing, the 91-page substitute (the original bill was about 200 pages long) was less expensive, roughly $50 billion over 10 years, rather than the $230 billion estimated cost of the original version of The Pension Preservation and Savings Expansion Act of 2003 (H.R. 1776) when it was introduced in April (see  Unfinished Business, Regulatory Relief Top Portman/Cardin Bill ).

Benched "Mark?"

>Most critically, the  chairman's amendment  would put in place a composite high-quality corporate bond index as a replacement for the 30-year Treasury bond interest rate for three years.   Original co-sponsor Representative Ben Cardin (D-Maryland) said that period is likely to be extended to five years on the floor. "At the end of the day, we want something longer than three years," he said, according to Washington-based publisher BNA.   Plan sponsors and unions appear to be in alignment on the need for a longer-term solution for this vexing issue.   The use of the 30-year Treasury bond rate, which has dipped to record lows in the wake of Treasury's decision to cease issuing new bonds several years ago, has had a sweeping and deleterious impact on the funding status of the nation's pension plans.

>Since 2002, companies have been operating under temporary relief through an expanded range around the now defunct 30-year Treasury rate used to calculate defined benefit funding status - relief that is set to expire at the end of 2003.   That rate has dropped to record, albeit artificial, lows in recent years, in effect inflating the amount of cash that companies with defined benefit pension plans must set aside to fulfill funding requirements.

>Under the bill approved by the House Ways & Means Committee on Friday (see  House Offers Sausage-Making Spectacle ), the new corporate bond rate, which is likely to reduce lump-sum amount calculations for workers who elect that option from their pension plans, would be applied to lump-sum distributions in the third year (2006).   That interest rate would be the lower of the corporate bond rate or the 30-year Treasury rate plus 20% of the difference between it and the corporate bond rate.   Lower interest rates inflate the value of lump sums, since they result in an assumption that more cash will be required up front to accumulate promised benefits.

On Friday Treasury Secretary John Snow said in a  prepared statement that the action on the Portman-Cardin bill "begins the process" of improving retirement security.   Earlier this month, the Bush Administration unveiled its proposal to phase in a bond rate yield curve for calculating pension funding obligations and lump-sum distributions (see  Bush Pushes Pension Reform Proposal ).   However, that proposal has drawn a tepid response from plan sponsors, lawmakers, and unions (see  Experts Say Administration Pension Proposal A Step in the Right Direction, But ….

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