“Much of the crisis facing employee pension plans today has to do with historically low interest rates that are artificially overstating pension plan liabilities and the Pension Benefit Guaranty Corporation’s (PBGC) reported deficit,” Klein said at a February hearing held by the House of Representatives Committee on Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions. “Anytime you evaluate a long-term obligation like a pension, with a snapshot point in time you will get a skewed and very misleading picture — either positively or negatively.”
Klein argued that historically low interest rates account for almost 80% of the PBGC’s self-reported deficit (see “Some Positives Exist Amid Dire PBGC Financial Picture”).
“Even if the deficit were accurate, it is a completely inappropriate basis for determining premiums. The imposition of a costly new premium regime will not materially improve pension plan solvency,” Klein said. “There is no question that the PBGC’s obligations are directly affected when underfunded pension plans terminate, and that is why public policy should be designed to help employers maintain their plans. But the most significant threat to defined benefit plans — and the PBGC — is not underfunding, since both the PBGC and most pension plans have sufficient assets to pay beneficiaries well into the future. The more urgent challenge is the persistent year-to-year volatility in funding obligations. Historically low interest rates have distorted the future value of investments, making healthy pension funds appear less well funded than they truly are.”
Employer pension plan sponsors are reporting that mandatory contributions for 2012 are soaring, many times more than what would be required under normal interest rates (see “Plan Sponsors Can Expect Contribution Increases in 2012”). When the interest rates rise again, this will cause plans to be dramatically overfunded. "For most companies, the amounts locked away to overfund healthy plans now is money that cannot be used effectively by the company — for hiring workers, facility construction or capital investment. This backwards approach to plan funding hurts employees, the employers and the economy," Klein said.
The ABC offered a funding proposal that would raise federal revenue and save existing jobs by resolving the current conflict between economic policy and pension policy.
For all purposes other than PBGC premiums and valuing lump sum distributions payable to participants, ABC proposes that beginning in 2012, plan liabilities would continue to be determined based on the average interest rates over the preceding two years. However, for purposes of determining such two-year average, any segment rate shall be disregarded to the extent that such segment rate is not within 10% of the average of such segment rates for the 25-year period preceding the current year.
Under the proposal, funding shortfalls would be amortized in two steps. First, the amount necessary to bring a plan to 80% funded would be amortized over the current-law seven-year period. Second, any other shortfalls would be amortized over 15 years.
More about the Council’s proposal is at http://americanbenefitscouncil.org/documents2012/db_funding_proposal012312.pdf.Last week, Alan Glickstein, a senior retirement consultant at Towers Watson, stated: “What would be helpful for plan sponsors is much-needed legislative relief that would help manage the impact of volatility in interest rates and encourage employers to fully fund their plans as the fragile economic recovery continues.” (See “Pension Plan Funding Levels Declined in 2011”).
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