The White House is proposing restrictions on defined benefit plans of employers with a below-investment-grade credit rating that are less than 50% funded. These plans would be prevented from offering any benefit increase until their funding status, and company credit rating, is improved, according to the US Department of Treasury’s Under Secretary for Domestic Finance Peter Fisher in a prepared statement given before the US Senate Subcommittee on Financial Management, the Budget and International Security.
Such measures are necessary, Fisher argues, so that company pension funds already teetering on the brink do not wind up in the hands of the Pension Benefit Guaranty Corporation (PBGC). This after recent revelations by PBGC Executive Director Steve Kandarian (See Steve Kandarian ),that the nation’s private pension insurer is staring into the maw of more than $350 billion in underfunded pension liabilities (See PBGC: Deficit Now Stands at $5.7 Billion ).
Increased Transparency, Disclosure
Fisher reiterated proposals that would increase the transparency of pension plan funding information. Under the proposal, plan sponsors would be required each year to disclose to participants, “the value of their pension plan’s assets and the level of liabilities measured on both an ongoing yield curve basis and a termination basis.” Further, t he Administration proposes that certain financial data already collected by the PBGC from companies sponsoring pension plans with more than $50 million of underfunding should be made public. Publicly available information of the underfunded plans would include:
- funding ratios of the underfunded plan.
Not included in the measure would be confidential employer financial information.
Yield Curve Priority
However, before steps can be taken in reducing pension liabilities, Fisher said the Bush Administration’s first priority is to provide a more accurate measure of pension liability to replace the now-defunct 30-year Treasury bond benchmark. Under the five-year plan first laid out in July, for the first two years, the contribution rate would be calculated from a new interest rate benchmark based on long-term conservative corporate bond rates (see Bush Pushes Pension Reform Proposal ), as proposed in reform legislation put forward by Representatives Benjamin Cardin (D-Maryland) and Rob Portman (R-Ohio) (See Unfinished Business, Regulatory Relief Top Portman/Cardin Bill ).
After a two-year transition, however, the Administration’s proposal goes off in another direction. At that point, firms would have to start phasing in calculations that take into account when their pension bills would actually come due, using different points on the corporate bond yield curve. The phase-in would be complete by the fifth year.
Concurring with this view for a fix for the calculation was Kathy Cissna, director of retirement plans for R.J. Reynolds, testifying on behalf of the American Benefits Council (ABC). “In our view, the most pressing requirement is to replace the obsolete 30-year Treasury bond interest rate for pension calculations. In 2003 and 2004 alone, contributions to defined benefit pension plans by Fortune 1000 companies are projected to exceed $80 billion per year – more than four times what was required just two years ago. More than half of these contributions are attributable to the inflationary effect of the broken 30-year Treasury bond rate,” Cissna said.
Cissna went to paid a dark picture of what the current environment of “artificially inflated funding requirements” do to the business landscape. “Facing pension contributions many times greater than anticipated, employers can’t hire workers, build new plants, or pursue research and development. For some employers, these inflated pension contributions are too much to bear, and they have been forced to terminate or freeze their pension plans,” Cissna said.
It is for these reasons that ABC stands by “replacing the obsolete 30-year Treasury rate with a blend of high-quality corporate bond rates that would be transparent, not subject to manipulation, and provide the kind of predictability necessary to plan pension costs. Much more conservative than what pension funds will actually earn, this rate would also ensure plans are funded responsibly,” according to an ABC news release. The ABC, along with a number of other employer advocacy groups and consultants, has previously expressed some concern with the current Bush proposal (see Experts Say Administration Pension Proposal A Step in the Right Direction, But… ).
These proposals were received with a mixed reaction when first unveiled in July. Overall, sentiment among the consulting community was that the Administration is taking positive steps to modify the convoluted current system. Nonetheless, more steps need to be taken before plan sponsors can evaluate the full impact of the Bush proposal (See Experts Say Administration Pension Proposal A Step in the Right Direction, But… ). Primarily, it is the use of the administration's as yet undefined yield curve that raises the most concerns about opening a Pandora's box of volatility and complexity in valuing pension liabilities.
Echoing these sentiments, the US House of Representatives Ways and Means Committee in July approved a different approach that would give companies with underfunded pension plans relief for three years while a permanent replacement formula for calculating liabilities is sought. However, that proposal was caught up in a partisan melee and it is remains unclear when or whether it will come up on the House floor (See House Offers Sausage-Making Spectacle ).
Additionally, Senate Finance Committee Chairman Charles Grassley unveiled legislation on Monday that is similar to the administration's plan. Aides said his committee would consider it on Wednesday (See Grassley To Unveil Age-Based Pension Yield Curve ).
A copy of Fisher's complete testimony can be found at http://www.treas.gov/press/releases/js732.htm .