Towers: Give DB Sponsors Pension Surplus Spending Ability

January 31, 2005 ( - When writing legislation to reform the nation's defined benefit private pension system, lawmakers should give employers more ability to use pension surpluses for other purposes.

That assertion was part of a series of pension reform recommendations being offered by Towers Perrin, according to a news release.

The announcement said that employers should have more spending flexibility if they will be expected to maintain fully funded plans on a solvency basis since increasing the minimum funding plan target will increase the likelihood that excess assets will accumulate over time.

>The company is also recommending that discontinuities and cliffs associated with current funding requirements should be eliminated and new actuarial smoothing techniques and amortization rules must be developed to make sure that funding requirements are understandable and produce predictable and stable results.

The smoothing issue is a controversial one with Merrill Lynch recently asserting (See Merrill: DB Sponsors Should Look at Interest Rate Swaps ) that a pension accounting shift away from smoothing to a mark to market approach “is not a question of if, but a question of when (See  Accounting Rulemakers Ponder ‘Mark to Market’ Approach ).”

“Without a permanent legislative framework for plan funding, it’s likely more companies will freeze or terminate their pensions in coming years, putting added pressure on federal programs and working Americans,” said Steve Kerstein, managing director of Towers Perrin’s HR Services Business retirement consulting practice. “Failure to enact balanced reform legislation this year threatens the survival of the voluntary pension system that provides lifetime financial security for millions of U.S. workers and retirees.”

Other Towers Perrin recommendations included:

  • instituting asingle measure of plan solvency “that is simple, transparent and market- based should drive minimum funding rules, tax deduction limits, PBGC premiums, all pension plan disclosures and other pension regulations”
  • the funding rules should be designed to maintain solvency over time, with the long-term funding target set at 100% of the solvency measure during a   transition to the new system
  • plan sponsors who relied on prior funding rules in good faith must be protected from immediate large, unexpected funding increases.

“Permanent funding reform legislation should balance the needs of all plan sponsors, the concerns of the government and taxpayers, and the security of pension promises in the US over the long term for as many plan participants as possible,” the company wrote. “The immediate threat that pension funding requirements pose for specific employers in certain financially troubled industries should be addressed separately and should not drive the long-term funding framework for all employers nationwide.”

>The Towers Perrin recommendations come as lawmakers consider DB reform proposals by the Bush Administration that called for stepped up pension insurance funding, more pension-related disclosures to participants, and simplified plan funding target rules among other things ( Chao Releases Administration DB Reform Proposal ).