Mercer: Pension Reform Solution Would Encourage Full Plan Funding

February 9, 2005 ( - Mercer Human Resources Consulting said Wednesday that its pension reform plan would increase transparency and improve funding stability and predictability.

In a news release, the company said that its solution would encourage employers to maintain their pension plans and critical benefits. Congress is currently looking at a change to pension funding rules as part of its deliberatons on reform of the nation’s private pension system (See Cover: An Uphill Battle ). 

Mercer has been working with regulators, congressional staff, trade associations, and large plan sponsors to create a proposal for reform, according to the news release. The company states its plan would increase transparency of pension plan’s financial condition and improve funding stability and predictability.  

According to the announcement, the Mercer plan:

  • promotes 100% funding of accrued benefits
  • promotes the use of market-based measurements for the sake of transparency and funding status
  • simplifies funding rules
  • uses mark-to-market measures of assets and liabilities to better communicate a plan’s real funding status
  • puts in place volatility limitations to provide predictability.

Mercer’s approach would also encourage employers to contribute additional amounts to create a cushion against fluctuations in plan asset value and would modify laws discouraging such a cushion by repealing the 10% excise tax on nondeductible contributions, the company said. The plan would also prohibit significantly underfunded plans from adding extra benefits and making lump-sum distributions, the news release said.

Plan sponsors seem to agree with the proposal, according to the news release. A poll by the company shows that 74% say they would trade higher funding targets for more predictable plan contributions. Eighty-six percent say that seriously underfunded plans should be restricted from improving benefits, while 57% feel they should be banned from making lump-sum distributions.

Warning that the financial integrity of the nation’s insurer of private defined benefit pensions was up in the air, the Bush Administration has called for new laws forcing employers to fully fund their pension plans (See White House to Congress: PBGC Needs Help ). Multiple companies have weighed in on the situation, many offering up their own solutions and opinions (See Towers: Give DB Sponsors Pension Surplus Spending Ability and UAW Says Bush Pension Plan Would Wreck System ).

The federal budget released this week noted that Bush administration proposals for shoring up traditional pensions included an increase in the insurance premiums charged to private companies — and that this would bring more money into the program’s coffers. In 2006 these changes would result in an additional $2.2 billion in premium income, the budget document said. The pension insurer, the Pension Benefit Guaranty Corporation (PBGC) currently charges companies $19 per year for each participant in a pension plan; under the administration’s proposal this number would rise to $30 immediately and future increases would be indexed to wage growth.

Also in the budget, Bush once again proposed a plan to overhaul Individual Retirement Accounts. The plan would create two new tax-deferred savings accounts, Retirement Savings Accounts and Lifetime Savings Accounts, that let taxpayers contribute after-tax dollars yet let funds to grow tax-free and be withdrawn without taxes (See  They’re Back: Bush Reintroduces ERSAs, RSAs, and LSAs ). Annual contribution limit for lifetime savings accounts is $5,000, the same as last year’s proposal. The accounts would raise $1.5 billion over 10 years as the Treasury counts on investors paying income taxes to convert existing IRAs into the new accounts.

US Department of Labor Secretary Elaine Chao first revealed the Administration’s reform proposal in a speech (See Chao Releases Administration DB Reform Proposal ).