Details Emerge on DRC Provision of Senate Bill

January 29, 2004 ( - The United States Senate's approval of Pension Stability Act with modifications to the deficit rate contribution (DRC) provisions also contains language to alert employees and the nation's private pension fund insurer of those amendments.

The Senate approved a version of the bill that grants roughly $16 billion in breaks to companies via a reduction in DRC.   Under the DRC provisions, airline and steel companies, those hit hardest by the recent pension underfunding storm, could waive 80% of those payments the first year and 60% the second year (See  Senate Passes Pension Funding Bill ).

However, such moves would not be made in the dark.   A pension plan that seeks to take advantage of the DRC “holiday” would be required to provide notices not only to the US Pension Benefit Guaranty Corporation (PBGC) but also to participants and beneficiaries of the plan.

Under the Senate’s version of HR 3108, employers anticipating reducing their DRC for their defined benefit plan must sent notice to the PBGC that includes:

  • the amount of the planned DRC reduction
  • the number of years it will take to restore the plan to full funding
  • information as to how the amount by which the plan is underfunded compares with the capitalization of the employer.

Participants and beneficiaries, on the other hand, must be notified of the amount of by which the DRC was reduced and the benefits under the plan which are guaranteed by PBGC and limitations on those guarantees.   The bill also stipulates that amendments to the company’s DRC will not be allow that “increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable shall be adopted during any applicable plan year.”

All of which might be for naught.   The US House of Representatives version of the bill was passed without amending the DRC provisions (See  House Approves Pension Relief Bill ).  With the Senate’s passage of the bill Wednesday, the two versions will now proceed to a joint House-Senate committee to be reconciled.

Industry Reaction

>The ERISA Industry Committee (ERIC) publicly commended the Senate in a news release for getting the Act passed .   “The passage of this pension funding legislation is a major step forward and a tribute to the Senate’s willingness to come together on a bipartisan basis and pass free-standing pension legislation at a critical time,” said Mark Ugoretz, president of ERIC in a news release.

On the other hand, the PBGC, while supportive of the House’s version of the bill, has previously come out against DRC amendments in the bill and in a letter signed by the three Cabinet secretaries who comprise the PBGC board – Elaine Chao of Labor, John Snow of Treasury and Donald Evans of Commerce – said they would advise President Bush to veto the bill if it should contain this provision because they said it would worsen pension plan underfunding, now estimated at $350 billion nationwide (See   PBGC Calls Out DRC Modifications).

In its most recent caution, the PBGC, which reported earlier this month a deficit of $11.2 billion, pointed to a weakened defined benefit system across the nation and fears that accelerating pension contributions would only worsen the PBGC’s situation.  In addition to a deficit that is three times larger than any previously reported shortfall, the PBGC is also exposed to $85 billion is plans sponsored by “financially weak employers” (See PBGC Says Pension Promises Outpace Funding ).

>A full text of the bill is available at .