Pomeroy Calls for Asset Smoothing Clarification

February 7, 2008 (PLANSPONSOR.com) - U.S. Congressman Earl Pomeroy has repeated his call for the U.S. Treasury Department to reverse course on the issue of defined benefit pension plan asset smoothing, charging that current regulations could force more plan freezes.

A news release from Pomeroy (D-North Dakota) said the smoothing rules in the Pension Protection Act (PPA) and implementing regulations make it unnecessarily hard for companies to manage their finances – particularly during down economies such as the one many economists believe exists currently.

Pomeroy contended that Treasury Secretary Henry Paulson needed to issue clarifying guidance on how plan sponsors could comply with the proposed PPA rules during 2008 while the department finalized the regulations. The Pomeroy announcement said previously issued department guidance does not effectively address potential plan sponsor smoothing issues (See DBSummit07: “After” Math ).

“Since the Pension Protection Act became law, 47 employers cut short workers pension benefits by freezing their pensions,” said Pomeroy, in the news announcement.  “Treasury’s proposed regulation on asset smoothing will push more employers to freeze pensions.  In these times of economic uncertainty, this Treasury regulation will force business to contribute millions more to their pension plan when that money could be invested into the economy, preserving jobs and wages.”

Pomeroy noted that Treasury’s proposed regulations on the PPA’s asset smoothing impose a pure arithmetic average.  “In effect, Treasury’s proposed regulations would force companies to use the fair market value of assets for funding purposes instead of a smoothed value that recognizes unexpected gains and losses over two years,” he said. “In troubled economic times, this proposal could have very adverse effects.

The PPA reduced smoothing time frames from four to two years.

In the examples cited in the Pomeroy announcement, a hypothetical company whose pension plan is 100% funded with $20 billion of assets and $20 billion of liabilities might be forced to assume that the value of plan assets on January 1, 2009, will fall by 10% to $18 billion given the current market volatility. 

Similarly, projected lower interest rates could raise plan liabilities to $21 billion. That would create a funding shortfall of $3 billion for 2009, triggering a funding obligation in 2009 of over $500 million, Pomeroy said. The company would need to put aside $500 million for 2009 in case it is needed for pension funding. 

By complying with smoothing rules, companies would be prevented from spending money on hiring more employees or business expansion, the lawmaker said.