In testimony before the US Senate Finance Committee Tuesday, the ERISA Industry Committee (ERIC) a trade group representing major employers, asserted that the Bush plan seeks to “re-invent the rules governing voluntary defined benefit pensions.”
In any event, the burden is now on lawmakers to figure out how the nation’s defined benefit system should be changed, the group said. “Whether at the end of the day employers are provided with a regulatory framework that encourages them voluntarily to establish, maintain, and fund pension plans – or whether they are faced with rules that discourage and even penalize such actions – will depend on the ability of Congress and stakeholders to find the right balance of rules and opportunities, risks, and protections,” according to the group’s testimony.
ERIC’s criticism echoed that of the American Benefits Council (ABC), which recently released its own critique of the Bush plan in mid-February (See ABC: Better DB Funding Status Disclosure Needed ). In that document , ABC likewise charged that the Administration’s ideas, first outlined in a January speech by Secretary of Labor Elaine Chao (See Chao Releases Administration DB Reform Proposal ), would end up hurting more than they helped. The proposal, ABC charged, “will reduce retirement security by making it far more difficult for employers voluntarily to sponsor defined benefit pension plans.” ABC also had representatives at the committee meeting Tuesday to distribute copies of its analysis.
According to ERIC the major weakness of the Administration’s proposal is the replacement of current law funding rules that provide some predictability and stability to a company’s funding requirements with an “unpredictable and extremely volatile system based on ‘spot rates.'” ERIC argued that the spot rate proposal would result in “volatility and lack of predictability” for employers, who could not “tolerate that much risk exposure” and that the Administration proposal would impose even harsher rules based on the financial health of the plan sponsor rather than the pension plan itself. Asserted ERIC: “A pension plan can be well funded even if the employer-sponsored is having difficulty. “
Te result, according to ERIC: “caus(ing) the very plan terminations Congress seeks to avoid.”
Rather, ERIC called on the Finance Committee members to make permanent the benchmark for measuring pension plan liabilities that Congress enacted in 2003 which is based on long term corporate bond indexes that are “public and transparent.” That corresponds to the Administration proposal calling for a benchmark based on a yield curve, yet to be developed by Treasury employees, that ERIC said which “would require a company to measure plan liabilities based on guesstimates of plan payouts far into the future” and one that “adds additional volatility, is complex, and is opaquely confusing. “
Fixed income versus Equities
ERIC also criticized suggestions by some that employers rely on bonds rather than equities to minimize pension risk. In a separate statement, ERIC president Mark Ugoretz noted that there are not enough bonds available to fund the pension industry and that the Administration’s proposal would significantly disrupt both the equity and bond markets as companies rushed from stocks to bonds.
The ERIC critique, while backing a “soundly financed” Pension Benefit Guaranty Corporation (PBGC) – the nation’s private sector pension insurer – questioned whether the agency is really in the dire financial straights it claims. Although the agency contends it had a $23 billion deficit at the end of 2004, almost 75% of its proclaimed shortfall – $17 billion – was due to claims it had not yet received and may not receive in 2005. “These claims, dubbed “probables” by the PBGC, for the most part reflect a troubled airline industry rather than a broad section of companies with pension plans,” ERIC claimed.
Also Tuesday, a representative of the Business
Roundtable outlined that group's view of needed pension
changes. Larry Zimpleman, President of Retirement and
Investor Services at the Principal Financial Group stated
"the best way to protect pensions for future retirees is to promptly enact permanent rules that lead to a stable, fair and predictable system."
According to the group, any changes have to provide predictability "so employers can continue to grow, create jobs and make new investments" allow companies the flexibility to fund their pensions in good economic times, and provide more timely and accurate disclosure.
The group also called for strengthening pension rules in a carefully targeted manner to address employers that are significantly underfunding plans who the group claimed posed a "moral hazard" to the system. "In making changes to the defined benefit funding rules, it is vitally important to recognize the impacts these changes can have on the US economy, our capital markets and the current employers who are participating in the defined benefit system today," testified Zimpleman. "Unintended consequences could be devastating."
Zimpleman outlined key issues that Business Roundtable members believe are essential for a "vibrant and sustainable" defined benefit system, first set out by the group in mid-January:
- making the long-term corporate bond rate permanent
- preserving rules that make pension funding predictable
- eliminating barriers to pre-funding
- refraining from discouraging advance funding
- avoiding unnecessary bankruptcies
- providing timely and appropriate disclosure
- keeping "good plans" in the system
- confirming the legality of hybrid plan designs.
The group's key issues are further outlined here .
Also Tuesday, Assistant Labor Secretary Ann Combs appeared before the Senate panel to defend the Administration's proposal. In her testimony , Assistant Secretary Ann Combs claimed the suggested reforms would protect the nation's retirees.
"The Bush Administration believes that the pension promises companies have made to their workers and retirees must be kept," Combs testified "The consequences of not honoring pension commitments are unacceptable - the retirement security of millions of current and future retirees is put at risk. Ourproposal will strengthen the defined benefit system, so that the nation's workers and retirees can be confident of the secure retirement they have worked for all their lives."
More information about the Administration's proposal is here .