Pomeroy Shares Pension Funding Reform Thoughts

Among the notions Pomeroy is pondering, according to the “discussion draft” released by his office, are:

• A loosening of restrictions on asset smoothing by expanding the corridor which currently limits the smoothed values to stay within 10% of the fair market value (FMV) of plan assets.   Under this relief provision, smoothed values would have to remain to be within 20% FMV.  The wider corridor would revert back to one based on 10% in the 2011 plan year. 
• The investment losses that occurred in 2008 are so large that seven-year amortization creates unmanageable funding obligations.  Pension plans may elect one of two alternative amortization schedules for the investment losses that occurred during the market meltdown.  One alternative would provide two years time to recover losses, and during that period sponsors would be required to pay interest on the “2008 losses” to preventing the shortfall from growing. The second proposal offers an expansion of the amortization period but is specifically targeted at the funding challenge created by the “2008 losses” in plan investments. 
• If a sponsor elects one of the two alternative amortization relief options described above in the “Amortization of Unprecedented Investment Loss” section, the sponsor would a gree not to freeze an ongoing defined benefit pension plan or not to suspend matching contributions for non-highly compensated employees in its 401(k) plan if the defined benefit pension utilizing relief was frozen as of December 31, 2008.
• A plan’s funded status for 2008 shall be deemed to remain in effect for 2009 and 2010 for purposes of determining whether the plan sponsor may use its prefunding balance or funding standard carryover balance in the next year.  The current situation is the difficult time when plans should be able to use these extra funds contributed to the plan.
• Restoring the date for determining the benefits guaranteed of plan participants by the Pension Benefit Guaranty Corporation, in the event a plan is terminated during a bankruptcy proceeding, as the plan termination date.  PPA changed the date to the bankruptcy filing date.

“Defined benefit pension plans are an important means of ensuring workers’ lifetime income security in retirement and should be preserved,” Pomeroy said in a statement. “Without additional relief more employers may elect to freeze their pension plans given the dimension of the funding requirements coming in 2010.  Additionally, the historic economic downturn, coupled with stringent pension funding requirements enacted in the Pension Protection Act will likely force employers to divert money away from job growth at a time when we are starting on the path to recovery.”

Additional Pomeroy ideas include:

• To prevent the adoption of future ad hoc plan amendments that would reduce the funding level of the pension plan by draining assets from the pension to benefit a limited number of individual participants, such amendments would need to be funded before they became effective. 
• Future ad hoc benefit enhancement that can be paid to a limited group of participants in a lump sum must be immediately funded if the pension plan's funding level is less than 120% after the cost of the amendment is taken into account.  This provision would operate similarly to the current requirement for transfers of pension assets to a 401(h) trust for retiree health care costs. 
• Allowing multiemployer plans to elect a one-time fresh-start of the Funding Standard Account, with the sum of the outstanding balances amortized over a single 30-year period, effective starting with the 2009 or 2010 plan year.

The Pomeroy document is available  here .