Richard Jones, Chief Retirement Actuary at Hewitt Associates, said the perils that DB plans are facing today are not only due to the struggling economy, but are exacerbated by regulatory changes that limit the flexibility in how and when companies fund their plans. “The imminent need is for temporary relief to help employers solve the funding problems exacerbated by the recession,” he said.
According to Jones, Hewitt suggests:
- Widening – either temporarily or permanently – the asset “smoothing” corridor for pension funding calculations from 90% to 110% of market value, to 80% to 120% of market value (Jones noted that 80% to 120% was allowed under pre-Pension Protection Act rules); and
- Allowing amortization of 2008 asset losses over a period of time significantly longer than seven years, recognizing the unique nature of those events in financial history.
Speaking solely regarding multi-employer plans, Randy G. DeFrehn, Executive Director of the National Coordinating Committee for Multiemployer Plans, presented his group’s survey findings on the effects of the recession on the funding status of multi-employer plans. He noted that to avoid falling into certain “zones” defined by the PPA which could result in being forced to enter into a “funding improvement plan” or “rehabilitation plan,” many multi-employer DB plans changed asset allocations and plan benefits in an aggressive model. Because of that, and because of the market meltdown in the past year, plans now find themselves in the “zones” they were trying to avoid.
DeFrehn said most of his group’s proposals for funding relief were included in the recently introduced Preserve Benefits and Jobs Act (see House Members Introduce Pension Funding Relief Measure ); however, additional proposals included expansion of the Pension Benefit Guaranty Corporation’s (PBGC) ability to facilitate mergers or “alliances” of weaker plans into stronger plans, and expanding current Employee Retirement Income Security Act (ERISA) provisions to allow multi-employer plans to segregate liabilities associated with employers that have ceased plan participation and left without paying their full withdrawal liability.
Karen Friedman, Executive Vice President and Policy Director of the Pension Rights Center, said the Center supports funding relief, but only for companies that sponsor active defined benefit plans under which employees continue to accrue benefits. The Center feels companies with frozen plans should receive no additional funding relief.
“Companies that stood by their defined benefit programs while others abandoned or froze them deserve support from Congress,” she stated.
However, to get funding relief, Friedman suggests plans must make a commitment that employees will continue to earn new benefits under the plan at least until the end of the period in which relief is granted. In addition, Friedman said, the Center recommends that as part of funding relief, companies should be prohibited both from making contributions into deferred compensation arrangements, such as rabbi trusts, and from paying out benefits to executives from these plans during the relief period.
Aside from the call for funding relief, witnesses in the Senate HELP Committee's hearing on Pensions in Peril called for improvements to the PBGC's benefits program.
Barbara Bobvjerg, Director, Education, Workforce, and Income Security Issues at the Government Accountability Office, presented findings of a GAO report that indicatedthe agency takes around 36 months to calculate benefits for participants in plans it takes over (see PBGC Needs Help with Larger Seized Plans ).
The agency also did not properly communicate with some participants for several years or provide benefits estimations that were readily understandable, according to the report.
This is one problem that many steelworkers faced when their plans were turned over during the late 90s and early 00s, contended David R. Jury, Associate General Counsel for the United Steelworkers union. Jury presented the example of one plan that terminated in 2001 for which final benefits calculations were not presented to participants until May of 2008.
From 1998 to 2003, the PBGC initiated terminations of the defined benefit pension plans of 16 steel companies, involving over 250,000 participants and over $7 billion in unfunded guaranteed pension benefits, according to Jury.
While the pension benefits of most retirees are unaffected, pensioners who retired during the last five years prior to the termination or who were forced out of their jobs by plant shutdowns or disabilities often suffer substantial reductions in their pension benefits, he noted, citing a study by the PBGC published in September 2008, which indicated over 25,000 or 21% of participants in terminated steel industry plans had their benefits reduced, with an average cutback of 26%.
Jury went on to list the benefits workers are previously entitled to that the PBGC does not guarantee, including:
- early retirement supplements or "bridge" benefits that are typically designed to provide a retiree with additional income until he or she becomes eligible for Social Security;
- severance or lump sum death benefits;
- disability benefits when disability occurs after plan termination; and
- as a result of the PPA, benefits earned after the employer's date of bankruptcy filing or benefits earned after a plan's funding target falls below 60%.
It is the actions of the PBGC, the Treasury, and the government's Auto Task Force that are making salaried retirees of the now-bankrupt Delphi suffer, according to Bruce Gump, Chairman of the Delphi Salaried Retirees Association. A group of Delphi salaried retirees has filed a lawsuit claiming they stand to lose between 30% and 70% of their pension benefits because the PBGC does not cover supplementary benefits such as payments intended to bridge a retiree until Social Security, and because the PBGC caps annual payments to retirees (see PBGC Sued by Delphi Retirees ).
In addition, Gump noted that the Treasury and Auto Task Force intervention in the expedited GM bankruptcy produced an offer from GM to "top up" the pensions of Delphi's hourly workers represented by the UAW, but a similar offer was not extended to salaried workers.
The HELP Committee hearing testimony can be obtained here .