There’s some good news and bad news for defined benefit plan sponsors absorb in the wake of compromise legislation featuring a key provision pertaining to pension funding stabilization.
“The final transportation funding and student loan extension legislation, passed by Congress, represents a mixed bag for employer sponsors pension plans and ultimately, of course, for the plan participants,” American Benefits Council President James A. Klein says. The measure includes several pension-related features to help pay for the transportation and student loan provisions.
“We are very gratified that Congress enacted the funding stabilization provision — based on a proposal the Council developed – that gives companies a more historically accurate and less volatile method of achieving full funding,” he adds. “Employers will now have a somewhat easier time maintaining their pension plans and can therefore devote resources to important job retention initiatives. We applaud Congress for its action.”
“The Federal Reserve Board’s ongoing low-interest-rate policy has had the unintended effect of making pension funds appear less well funded than they truly are, triggering abnormally high pension liabilities. The interest rate stabilization provision included will help many employer pension plan sponsors navigate our extraordinary economic environment,” Klein says.
“As much as we appreciate the inclusion of pension funding stabilization, we strongly disagree with the decision to impose an additional $9 billion in pension plan premium hikes,” Klein said. “The increase in insurance premiums paid to the Pension Benefit Guaranty Corporation [PBGC] effectively acts as a tax increase on companies that sponsor these plans for their employees.”
“Unfortunately,” he adds, “large PBGC premium increases could negate the positive effect of the funding stabilization for several companies. Some have argued that raising premiums was the quid pro quo for enacting funding stabilization. But that is a false trade-off. Had Congress enacted even broader stabilization the federal revenue gain would have been higher, obviating the need to raise premiums.”
He continues: “We are pleased, however, that the bill also institutes long-overdue improvements to the agency’s governance structure — particularly in light of the agency’s recent Inspector General Management Advisory report, which called into question the integrity of reported actuarial estimates.”
Klein also commends lawmakers for including a provision extending the ability of employers to transfer excess pension assets to fund retiree health benefits and expanding the provision to allow transfers for retiree life insurance. “These transfers facilitate the continuation of retiree health insurance for countless retirees. Expanding this provision to allow transfers to pay the costs of retiree life insurance will also help foster personal financial security for seniors,” he says. The Council had urged the House Ways and Means Committee leadership to support this provision.
“The legacy of this legislation, for defined benefit pension plan sponsors, will largely depend on each company’s unique circumstances,” Klein says. “For some, the urgent need for funding stabilization will outweigh the cost of premium increases. For others, premium increases will present a more serious challenge. For the latter companies, the legislation could serve as another incentive to exit the system, which we know is not Congress’ intent.”
