Lawmakers Hear Suggestions for DB Plans
Speaking to the U.S. House Ways and Means Subcommittee on Select Revenue Measures, Deborah Tully, director of Compensation and Benefits and Accounting Analysis at Raytheon Company, which closed its DB plan to new employees beginning in 2007, urged support for Subcommittee Chairman Representative Pat Tiberi’s (R-Ohio) bill to provide relief for nondiscrimination testing for closed DB plans. H.R. 5381 liberalizes the rules under which employers use cross testing for their closed plans, and allows the benefits, rights and features that are available only to a closed group of employees to be considered nondiscriminatory if they were nondiscriminatory at the time the plan was closed. Similar legislation has been introduced in the U.S. Senate.
Scott Henderson, vice president of Pension Investments and Strategy at The Kroger Co., said his company has a different problem. As a member of several multiemployer pension plans, it has been forced to take on liabilities for pension benefits of employees of other firms that have exited multiemployer plans. Henderson contended, “There are two fundamental problems with the multiemployer plan system, namely, withdrawal liability and the last man standing rule.”
He explained that when a withdrawing employer fails to pay its portion of the plan’s unfunded liabilities—which often happens when employers file for bankruptcy or go out of business—responsibility for funding the unfunded liabilities shift to the remaining employers contributing to the plan. This is known as the “last man standing rule.” The law requires withdrawing employers to pay a withdrawal liability, but Henderson noted, even if they do pay 100% of the withdrawal liability, investment losses on those assets would have to be made up by the remaining employers. Henderson argued the last man standing rule can saddle remaining employers with pension obligations for employees who may have worked for a competitor or in a completely different industry than the remaining employers—an unfair burden. He added that this rule discourages new employers from entering multiemployer plans.
Henderson encouraged lawmakers to consider proposals by the National Coordinating Committee for Multiemployer Plans’ (NCCMP) Retirement Security Review Commission. In 2013, the NCCMP suggested proposals that would strengthen the current multiemployer plan system, assist deeply troubled plans, and encourage new plan designs.
Dale Hall, managing director of research for the Society of Actuaries, argued that new mortality tables are needed for use in calculating DB plan liabilities, given American’s increased life spans. “We believe that it is critically important for professional actuaries to have access to reliable and well-supported data so that they can provide meaningful projections to the broad range of stakeholders responsible for governing private pension plans,” he said. Hall defended the society’s method for determining new mortality tables it proposed earlier this year, which has been questioned by industry and employer groups, and he confirmed that the society is still expecting to issue final tables by October 31.
Jeremy Gold, from actuarial consulting firm Jeremy Gold Pensions, claimed that pension plan liabilities are underestimated by as much as 50%, and annual costs are underestimated by as much as 100%. “Good policies cannot be based on bad numbers,” he said. According to Gold, “unless accurate estimates of future cost are on the table and open for all to see, the combination of benefits cuts and employer costs will not reduce the deficit” of pension plans. He said the deficit will only get bigger unless plan sponsors know the right price for all future benefit accruals and make sure, at a minimum, these are paid, and the deficit is accurately measured and plan sponsors decide how and when to fill the gap.
Gold suggested “the concept of an independent consulting actuary putting a value on these benefits is irreparably flawed.” He added, “The party setting the price must have very significant skin in the game and capital at risk. The party that sets the price must also guarantee the benefits and hold sufficient capital to make good on its guaranty.” According to Gold, the party doesn’t have to be an insurance company, but “they must combine capital, benefit guarantees and actuarial expertise.”
In a statement made for the hearing, the ERISA Industry Committee (ERIC) added to these suggestions continued funding relief for DB plan sponsors. “These plan sponsors need to be able to contribute more to their retirement plans when they are financially able and obtain relief during the years when it is needed,” ERIC said. It also recommended that lawmakers refrain from further increasing premiums DB plan sponsors must pay to the Pension Benefit Guaranty Corporation (PBGC).
Complete hearing testimony can be downloaded here.
ERIC’s statement is here.