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
>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
>Most critically, the
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
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
>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
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
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